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In: Accounting

The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table...

The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 4,200 sets per year. Annual cost data at full capacity follow: Direct labor $ 91,000 Advertising $ 102,000 Factory supervision $ 67,000 Property taxes, factory building $ 18,000 Sales commissions $ 60,000 Insurance, factory $ 6,000 Depreciation, administrative office equipment $ 2,000 Lease cost, factory equipment $ 20,000 Indirect materials, factory $ 18,000 Depreciation, factory building $ 104,000 Administrative office supplies (billing) $ 3,000 Administrative office salaries $ 113,000 Direct materials used (wood, bolts, etc.) $ 431,000 Utilities, factory $ 48,000 ________________________________________ 2. Compute the average product cost of one patio set. (Round your answer to nearest whole dollar.) 3. Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged? Increase Decrease Remain unchanged

Solutions

Expert Solution

Solution:

Part 1 –

Average Product Cost at Full Capacity

Type of Expense

$$

Direct Materials Used

Direct Costs

$431,000

Direct labor

Direct Costs

$91,000

Manufacturing Overhead Cots:

Factory Supervision

Indirect Manufacturing OH

$67,000

Property taxes, factory building

Indirect Manufacturing OH

$18,000

Insurance factory

Indirect Manufacturing OH

$6,000

Lease cost, factory equipment

Indirect Manufacturing OH

$20,000

Indirect materials, factory

Indirect Manufacturing OH

$18,000

Depreciation, factory building

Indirect Manufacturing OH

$104,000

Utilities, factory

Indirect Manufacturing OH

$48,000

Total Production Cost

$803,000

Number of Units Production (Capacity)

4,200 Sets

Average Product Cost per set

$191.19

Note – Sales commission, depreciation admin office equipment, admin office supplies and admin office salaries are selling and administrative expenses and these are not production cost. Hence no included in product cost.

Part 2 -- Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged? Increase Decrease Remain unchanged ---- Average Product Cost per set will INCREASE

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you


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