P2-24 Heritage Company manufactures a beautiful bookcase that enjoys widespread
popularity. The company has a backlog of orders that is large enough to keep
production going indefinitely at the plant’s full capacity of 4,000 bookcases
per year. Annual cost data at full capacity follow:
Direct materials
used (wood and glass) $430,000
Administrative
office salaries $110,000
Factory supervision
$70,000
Sales commissions $60,000
Depreciation,
factory building $105,000
Depreciation,
administrative office equipment $2,000
Indirect materials,
factory $18,000
Advertising $100,000
Insurance, factory $6,000
Administrative
office supplies(billing) $4,000
Property taxes,
factory $20,000
Utilities, factory $45,000
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
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.)
Cost behaviour Selling
for administrative cost Product cost
Cost item Variable Fixed
Direct Indirect*
Materials used $430,000
$430,000
Administrative
office
Salaries $110,000 $110,000
*To units of product
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 unchanged? Explain. No computations are necessary.
4. Refer to the original data. The president’s next-door neighbor has
considered making himself a bookcase and has priced the necessary materials at
a building supply store. He has asked the president whether he could purchase a
bookcase from the Heritage Company “at cost,” and the president has agreed to
let him do so.
a. Would you expect any disagreement between the two men over the price
the neighbor should pay? Explain. What price does the president probably have
in mind? The neighbor?
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 neighbor and still be selling “at cost”? Explain.
TUTORIAL PREVIEW
Selling or
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Cost Behavior
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Administrative
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Product Cost
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Cost Item
|
Variable
|
Fixed
|
Cost
|
Direct
|
Indirect
|
Direct materials
used (wood, glass)
|
$430,000
|
$430,000
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Administrative
office salaries
|
$110,000
|
$110,000
|
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Factory supervision
|
70,000
|
$70,000
|
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