EXERCISE 1-9 Classification of Costs into Various Categories (LOI, LO2, LO5, LO7) Several years ago Medex Company purchased a small building adjacent to its manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, the building was rented out to another company for a rental revenue of $40,000 per year. The renter's lease will expire next month, and rather than renew the lease, Medex Company has decided to use the building itself to manufacture a new Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a super- visor to oversee production. Her salary will be $2,500 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a warehouse nearby in order to store finished units of product. The rental cost will be $1,000 per month. In addition, the company will need to rent equip- ment for use in producing the new product; the rental cost will be $3,000 per month. The company will product. 64 Chapter continue to depreciate the building $10,000 per year. Advertising costs for the new product will total $50,000 per year. Costs of shipping the new product to customers will be $10 per unit. Electrical costs of operating machines will be $2 per unit. To have funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of $6,000 per year straight-line basis, as in past years. Depreciation on a on the building is Required: Prepare an answer sheet with the following column headings: Product Cost Name Manufacturing Overhead Period (selling and administrative) Cost Opportunity Sunk Cost Direct Direct Materials Labor of the Variable Fixed Cost Cost Cost Cost List the different costs associated with the new product decision down the extreme left column (under Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be X's under several column headings for a single cost. (For example, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost.)