PROBLEM 1–19A Cost Classification and Cost Behavior [ LO3 , LO6 , LO7 ]

The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow:

Required:
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 been done already for the first two items in the list above. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as 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 of one patio set.
3. Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged? Explain. No computations are necessary.

4. Refer to the original data. The president’s brother-in-law has considered making himself a patio set and has priced the necessary materials at a building supply store. The brother-in-law has asked the president if he could purchase a patio set from the Dorilane Company “at cost,” and the president agreed to let him do so.

a. Would you expect any disagreement between the two men over the price the brother-in-law should pay? Explain. What price does the president probably have in mind? The brother-in-law?

b. Because 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 brother- in-law and still be selling “at cost”?

Factory labor, direct. Advertising....... $118,000 $50,000 Factory supervision..... $40,000 Property taxes, factory building.. $3,500 Sales commissions..... $80,000 Insurance, factory $2,500 Depreciation, administrative office equipment... $4,000 Lease cost, factory equipment.. $12,000 Indirect materials, factory...... $6,000 Depreciation, factory building $10,000 Administrative office supplies (billing). $3,000 Administrative office salaries $60,000 Direct materials used (wood, bolts, etc.). $94,000 Utilities, factory............. $20,000