Several years ago, Wallace Company purchased a small building adjacent to its manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, it rented out the building to another company for a rental revenue of $35,000 per year. The renter’s lease will expire soon, and rather than renewing the lease, Wallace Company has decided to use the building itself to manufacture a new product. Direct materials cost for the new product will total $50 per unit. It will be necessary to hire a supervisor to oversee production. His salary will be $3,000 per month. Workers will be hired to manufacture the new product, with direct labour cost amounting to $22 per unit.
Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a warehouse nearby to store finished units of product. The rental cost will be $1,500 per month. In addition, the company will need to rent equipment for use in producing the new product; the rental cost will be $2,200 per month. The company will continue to depreciate the building on a straight-line basis, as in past years. Depreciation on the building is $7,000 per year. Advertising costs for the new product will total $28,000 per year. Costs of shipping the new product to customers will be $7 per unit. Electrical costs of operating machines will be $4 per unit. To have funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are yielding a return of $5,000 per year.
Prepare an answer sheet with the following column headings:
List the different costs associated with the new product decision down the left column (under Name of the Cost). Then place an X under each heading that describes the type of cost involved. There may be X’s under several column headings for a single cost. (For 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.)

  • CreatedJuly 08, 2015
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