Management Accounting

Question

Several years ago, 4R 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 renewing the lease, 4R Company has decided to use the building itself to

manufacture a new product.

Direct materials cost for the new product will total $40 per unit. It will be necessary to

hire a supervisor 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

equipment for use in producing the new product; the rental cost will be $3,000 per

month. The company will continue to depreciate the building on a straight-line basis, as

in past years. Depreciation on the building is $10,000 per year.

Advertising costs for the new product will total $50,000 per year. Costs of shipping the

new product 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.

Required

For each listed cost item below, place an "X" under each heading that

helps to describe the type of cost involved.

Variable Fixed Direct Direct Manufacturing Period Opportunity

cost cost materials labor Overhead cost cost

1- Rental revenue foregone

2- Direct materials

3- Supervisor's salary

4- Direct labor

5- Warehouse rental

6- Equipment cost

7- Advertising cost

8- Shipping cost

9- Return on investment

10- Electrical cost