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 renter’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:
Product CostPeriod
(Selling andName
Of the
CostVariable
CostFixed
Cost
Direct
MaterialsDirect
LaborManufacturing
OverheadAdministrative)
CostOpportunity
CostSunk
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 X’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).
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March 15, 2011

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