Wollongong Group Ltd, of New South Wales, Australia, acquired its factory building about 10 years ago. For several years the company has rented out a small annex attached to the rear of the building. The company has received a rental income of $30.000 per year on this space. The renterâ€™s lease will expire soon, and rather than renewing the lease, the company has decided to use the space itself to manufacture a new product.
Direct materials cost for the new product will total $80 per unit. To have a place to store finished units of product, the company will rent a small warehouse nearby. The rental cost will be $500 per month. In addition, the company must rent equipment for use in producing the new product; the rental cost will be $4,000 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $60 per unit. The space in the annex will continue to be depreciated on a straight-line basis, as in prior. This depreciation is $8,000 per year.
Advertising costs for the new product will total $50,000 per year. A supervisor will be hired to oversee production; her salary will be $1,500 per month. Electricity for operating machines will be $1.20 per unit. Costs of shipping the new product to customers will be $9 per unit. To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of about $3,000 per year. Required:
Prepare and answer sheet with the following column headings:
CostList the different costs associated with the new product decision down the extreme left column (under Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be Xâ€™s under several column headings for a single cost. (Foe example, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost).