P2–9 Cost identification Time allowed: 40 minutes The Dorilane Company specializes in producing a set of wooden 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 pound 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 be classified as being either direct or indirect as shown.)
2 Total the pound amounts in each of the columns in 1 above. Compute the cost to produce one patio set.
3 Assume that production drops to only 1,000 sets annually. Would you expect the cost per set to increase, decrease, or remain unchanged?
Explain. No computations are necessary.
4 Refer to the original data. The managing director’s brother-in-law has considered making himself a patio set and has priced the necessary materials at a building supply shop. The brother-in-law has asked the managing director if he could purchase a patio set from the Dorilane Company ‘at cost’, and the managing director 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 managing director probably have in mind? The brother-in-law?

(b) Since the company is operating at full capacity, what cost term used in the chapter might be justification for the managing director to charge the full, regular price to the brother-in-law and still be selling ‘at cost’?

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