The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and four chairs. The company has ample orders to keep production going at its full capacity of 2,000 sets per quarter. Quarterly cost data at full capacity follow:

Factory labour, direct.....................................$168,000Advertising...........................................................50,000Factory supervision............................................50,000Property taxes, factory building..........................4,500Sales commissions..............................................80,000Insurance, factory.................................................3,500Depreciation, office equipment........................14,000Lease cost, factory equipment............................6,000Indirect materials, factory....................................6,000Depreciation, factory building.............................8,000General office supplies (billing)...........................4,000General office salaries........................................50,000Direct materials used (wood, bolts, etc.)........114,000Utilities, factory...................................................30,000

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 preceding list. 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 being either direct or indirect, as shown.)

2. Total the dollar amounts in each of the columns in part (1). Compute the average product cost per patio set.

3. Assume that production drops to only 1,000 sets quarterly.Would you expect the average product cost per patio 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 a patio set and has priced the necessary materials at a building supply store. He has asked the president if he could purchase a patio set from the Mahela Company ?at cost,? and the president has agreed to let him do so.

a. Would you expect any disagreement over the price the brother-in-law should pay? Explain. What price does the president 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 president to charge the full, regular price to the brother-in-law and still be selling ?at cost??

Transcribed Image Text:

Cost Behaviour Product Cost Selling and Administrative Cost Variable* Indirect* Cost Item Fixed Direct $168,000 Factory labour, direct $168,000 $50,000 Advertising $50,000 *To units of product.