Case #1 - Dorilane Company

The Dorilane Company produces a set of wood patio furniture consisting of a

table and four chairs. The company has enough customer demand to justify

producing its full capacity of 2,000 sets per year. Annual cost data at full

capacity follow:

Direct labor

$

118,000

Advertising

$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

Required:

1.

Prepare the data with the column headings shown below. Enter

each cost item on your data 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.)

Cost Behavior

Period

(Selling or

Administrativ

e)

Cost

Product Cost

Cost Item

Variable

Fixed

Direct

Indirect

*

Direct

labor

$118,000

$118,00

0

Advertising

$50,000

$50,000

*

To units of product.

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"?

Case #1 - Dorilane Company The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The company has enough customer demand to justify producing its full capacity of 2,000 sets per year. Annual cost data at full capacity follow: Direct labor 118,000 Advertising $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 $20,000Required: 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.)Peod Cost Behavior (Selling or Product Cost Administrativ e) Cost Item Variable Fixed Cost Direct Indirect $118.00 Direct labor $118,000 0 Advertising $50,000 $50,000 *To units of product. 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 brotherin-law should pay? Explain. What price does the president probably have in mind? The brotherinlaw? b. Because the company is operating at full capacity, what cost term used in the chapter might be justication for the president to charge the full, regular price to the brotherinlaw and still be selling \"at cost"