Wollogong 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 years. 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.

Prepare an answer sheet with the following column headings:

List 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. (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 thecost.)

  • CreatedMay 20, 2014
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