Response to the following problem:
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 2,000 sets per year. Annual cost data at full capacity follow:
Factory labor, direct$118,000
Advertising $50,000
Factory supervision $40,000
Property taxes, factory building $3,000
Sales commissions $80,000
Insurance, factory $2,500
Depreciation, office equipment $4,000
Lease cost, factory equipment $12,000
Indirect materials, factory $6,000
Depreciation, factory building $10,000
General office supplies (billing) $3,000
General office salaries $60,000
Direct materials used (wood, bolts, etc) $94,000
Utilities, factory $20,000
Required:
1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings. As examples, this has been done already for the first two items in the list above. 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 as shown.)
Cost Behavior Selling or Administrative Cost Product Cost
Cost Item Variable Fixed Direct Indirect
Factory labor, direct $118,000 $118,000
Advertising $50,000 $50,000
2. Total the dollar amounts in each of the columns in (1) above. Compute the average product cost of one patio set.
3. Assume that production drops to only 1,000 sets annually. Would you expect the average product cost of one set to increase, decrease, or remain unchanged? Explain. No computations are necessary.
4. Refer to the original data. The presidents brother-in-law has considered making himself a patio set and has priced the necessary materials at a building supply store. The brother-in-law has asked the president if he could purchase a patio set from the Dorilane Company at cost, and the president agreed to let him do so.
a. Would you expect any disagreement between the two men over the price the brother-in-law should pay? Explain. What price does the president probably have in mind the brother-in-law?
b. Since the company is operating at full capacity, what cost term used in the chapter might be justification for the president to charge the full, regular price to the brother-in-law and still be selling at cost?