Fancy Millwork has a factory that produces custom kitchen cabinets. It has multiple product lines.

Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs.

The company estimates that it will have 32,000 direct labor hours in total for the kitchen cabinets.

The materials include $2,000 for the wood and other materials on a per job basis. It requires 40 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 80%.

It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows. Please note that the amounts are per year unless identified otherwise:

Salaries- office & administrative					$ 400,000
Salaries for factory supervisors and janitors					$ 200,000
Office Rent					$ 90,000
Factory Rent					$ 80,000
Office Utilities and Misc office expenses(based on units sold)					$ 20,000
SalesTravel(based on units sold)					$ 24,000
Insurance - office					$ 14,000
Depreciation - office equipment					$ 45,000
Depreciation for factory equipment					$ 70,000
Advertising					$ 15,000
Sales commissions(based on units sold)					$ 50,000
Factory Property taxes					$ 10,000
Maintenance for factory equipment					$ 80,000

QUESTIONS:

1. Please identify the following classifications for all costs above: variable and fixed costs; product and period costs. I would recommend that you show a schedule for each area on a yearly basis. For the variable costs, also, show them on a per unit (800 units)

How does a company identify each type of cost? Can a cost classification be changed over time? If yes, explain how and give an least one example. If no, explain why?

2. Determine the average cost of manufacturing one custom kitchen assuming the units given.

Assume the MOH costs are allocated based on the direct labor hours per unit. Please show all calculations and round to the nearest dollar. I would recommend that you calculate the MOH per kitchen first. You should calculate an Overhead rate.

Discuss other options (at least 2) for the activity base and the importance of the MOH allocation. Do multiple product lines impact the MOH allocation? What happens if MOH is not allocated correctly to a product?

3. Prepare a Job Order Cost sheet for the following custom kitchen: Materials $5,500 and 60 hours of labor. What is the customer price?

What other factors would impact the sales price for this type of company? Can a company rely on setting price based on just a % on cost?

4. What is the Contribution Margin (CM) in total and per unit dollars, and CM% for the sale of 800 kitchen cabinets?

5. Prepare a traditional Income Statement assuming avolume of 800 units. For the cost of goods sold, please use the per unit cost you calculated in #1multiplied by number of units sold. You do not have to prepare any additional schedules. I would use a similar format to exhibit 16-8 on page 737 or from your lecture notes. I recommend that you list out all operating expenses given above. Do not use just Selling and General/Administrative Expenses for your categories. Points will be lost by not listing out all period costs. You can ignore interest and income tax expense.