Question

Staci Valek began dabbling in pottery several years ago as a hobby. Her work is quite creative, and it has been so popular with friends and others that she has decided to quit het job is $3,800 per month.
Staci will rent a small building near her home to use as a place for manufacturing the pottery. The rent will be $500 per month. She estimates that the cost of clay and glaze will be $2 for each finished piece of pottery. She will hire workers to produce the pottery at a labor rate of $8 per pot. To sell her pots, Staci feels that she must advertise heavily in the local area. An advertising agency states that it will handle all advertising for a fee of $600 per month. Staci’s brother will sell the pots; he will be paid a commission of $4 for each pot sold. Equipment needed to manufacture the pots will be rented at a cost of #300 per month. Staci has already paid the legal and filing fees associated with incorporating her business in the state. These fees amounted to $500. A small room has been located in a tourist area that Staci will use as a sales office. The rent will be $250 per month. A phone installed in the room for taking after-hours messages. Staci has some money in savings that is earning interest of $1,200 per year. These savings will be withdrawn and used to get the business going. For the time being, Staci does not intend to draw any salary from the new company.
1. Prepare an answer sheet with the following column headings:
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 company down the extreme left column (under Name of 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. (That is, 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.) Under the Variable Cost column, list only those costs that would be variable with respect to the number of units of pottery that are produced and sold.
2. All of the costs you have listed above, except one, would be differential costs between the alternatives of Staci producing pottery or staying with the aerospace firm. Which cost is not differential? Explain.


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  • CreatedMarch 15, 2011
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