The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep produc-tion going at 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 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.)

Cost Item Cost BehaviorPeriod (Selling or Administrative)

2. Total the dollar amounts in each of the columns in requirement 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”?

I was able to complete questions 1-3. I also completed 4b, but I am not sure how to go about answering question 4a.

PROBLEM 2-25 Cost Classification and Cost Behavior [LO 2—1, LO 2—2. LB 2—3, LO 2—4] The Dorilane Company specializes in producing a set of wood patio furniture consisting of a tableand four chairs. The set enjoys great popularity, and the company has ample orders to keep produc—tion going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow: Dlrect labor ………………………………. $1 18,000Advvertlslng ……………………………….. $50,000Factory supervtslon ………………………… $40,000Property taxes, factory bulldlng ……………….. $3,500Sales comrnlsslons …………………………. $80,000Insurance, factory ………………………….. $2,500Depreclaflon, adrnlnlsu’anve omce equlpment ……. $4,000Lease cost, factory equlpment ………………… $12,000lndlrect materlals. factory ……………………. $6,000Depreclallon, factory bulldlng ………………… $10,000Admlnlsu’atlvve omoe stpplles [bllllng] …………… $3,000Admlnlsh’allvve omce salarles …………………. $60,000Dlrect materlals used (wood, bolts, em} …………. $94,000Uljllfles. factory ……………………………. $20,000 Required: 1. Prepare an answer sheet with the column headings shown below. Enter each oost item on youranswer sheet, placing the dollar amount under the appropriate headings. As examples, this hasbeen done already for the first two items in the list above. Note that each cost item is classifiedin 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.) Dlrect labor …… $1 18.000Advertlslng ……. $50,000 $50,000 ‘To unilsofprmhct. $1 18.000 2. Total the dollar amounts in each of the columns in requirement 1 above. Compute the averageproduct mat of one patio set. 3. Assume that production drops to only LII!) sets annually. Would you expect the average productcost per set to increase, decrease, orremain unchanged? Explain. No computations are necessary.