Question

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 4,100 sets per year. Annual cost data at full capacity follow:

Direct labor	$	94,000
Advertising	$	105,000
Factory supervision	$	68,000
Property taxes, factory building	$	22,000
Sales commissions	$	56,000
Insurance, factory	$	7,000
Depreciation, administrative office equipment	$	2,000
Lease cost, factory equipment	$	14,000
Indirect materials, factory	$	20,000
Depreciation, factory building	$	105,000
Administrative office supplies (billing)	$	3,000
Administrative office salaries	$	106,000
Direct materials used (wood, bolts, etc.)	$	429,000
Utilities, factory	$	40,000

Required:

1. Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.) (If your answer is zero, leave the cell blank.)
Cost Behavior Product Cost Period (Selling or Administrative) Cost Variable Fixed Direct Indirect Cost Item Direct labor Advertising Factory supervision Property taxes, factory building Sales commissions Insurance, factory Depreciation, administrative office equipment | Lease cost, factory equipment Indirect materials, factory Depreciation, factory building Administrative office supplies (billing) Administrative office salaries Direct materials used (wood, bolts, etc.) Utilities, factory Total costs $ 0 % 0 % 0 % 0 $

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

Answer 1

1
	Cost behavior		Selling or administrative	Product cost
	Variable	Fixed	Cost	Direct	Indirect
Direct labor	94000			94000
Advertising		105000	105000
Factory supervision		68000			68000
Property taxes, factory building		22000			22000
Sales commissions	56000		56000
Insurance, factory		7000			7000
Depreciation, administrative office equipment		2000	2000
Lease cost, factory equipment		14000			14000
Indirect materials, factory	20000				20000
Depreciation, factory building		105000			105000
Administrative office supplies (billing)	3000		3000
Administrative office salaries		106000	106000
Direct materials used (wood, bolts, etc.)	429000			429000
Utilities, factory	40000				40000
Total costs	642000	429000	272000	523000	276000
2
Average product cost of one patio set	195	=(523000+276000)/4100
3
Average product cost per set would increase