EXERCISE 2-1 Identifying Costs [LO1-CC1; LO3 - CC3; LO4 - CC4, 5, 6, 7] Royal Group Ltd. of Medicine Hat, Alberta, acquired its factory building about 20 years ago. For several years, the company has rented out a small annex attached to the rear of the building. The company has received a rental income of $50,000 per year on this space. The renter's lease will expire soon, and rather than renew the lease, the company has decided to use the space itself to manufacture a new product. Direct materials cost for the new product will total $60 per unit. To have a place to store finished units of product, the company will rent a small warehouse nearby. The rental cost will be $1,000 per month. In addition, the company must rent equipment for use in producing the new product; the rental cost will be $15,000 per month. Workers will be hired to manufacture the new product, with direct labour costs amounting to $80 per unit. The space in the annex will continue to be depreciated on a straight-line basis, as in prior years. This depreciation is $5,000 per year. Page 49 Advertising costs for the new product will total $150,000 per year. A supervisor will be hired to oversee production, with a salary of $3,500 per month. Electricity for operating machines will be $1.80 per unit. Costs of shipping the new product to customers will be $12 per unit. To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are currently yielding an average return of about $5,000 per year. Required: Prepare an answer sheet with the following column headings: Product Cost Name of the Cost Variable Cost Fixed Cost Direct Materials Direct Labour Manufacturing Overhead Period (Selling and Administrative) Cost Opportunity Cost Sunk 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 describe the type of cost involved. There may be Xs 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 put an X under each of these headings opposite the cost.)