Heritage Company manufactures a beautiful bookcase that is very popular. The company has sufficient demand to keep production going indefinitely at the plant’s full capacity of 4,000 bookcases per year. Annual cost data at full capacity follow:
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 already been done for the first two items in the list above. Note that each cost item is classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold and, second, as either 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.)
2. Total the dollar amounts in each of the columns in (1) above. Compute the average product cost per bookcase.
3. Due to a recession, assume that production drops to only 2,000 bookcases per year. Would you expect the average product cost per bookcase to increase, decrease, or remain un-changed? Explain. No computations are necessary.
4. Refer to the original data. The president’s next-door neighbour has considered making herself a bookcase and has priced the necessary materials at a building supply store. As an alternative, she has asked the president whether she could purchase a bookcase from the Heritage Company “at cost,” and the president has agreed to let her do so.
a. Would you expect any disagreement between the two over the price the neighbour should pay? Explain. What price does the president probably have in mind? The neighbour?
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 neighbour and still be selling “at cost”? Explain.

  • CreatedJuly 08, 2015
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