sa3b
Oct 16, 2012, 10:06 PM
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 rental revenue of $40,000 per year. The renter's lease will expire next month, and rather than renewing the lease, Medex 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 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..
Required:
For each of the costs associated with the new product decision, indicate whether it would be variable or fixed. If it is a product cost, indicate whether it would be direct materials, direct labor or a manufacturing overhead cost. If it is not a product cost, indicate whether it is a period, opportunity or a sunk cost. Select "None" if none of the categories apply for a particular item. NOTE: Opportunity cost is a special category, and to avoid confusion, do not attempt to classify the cost in any other way except as an opportunity cost.
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 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..
Required:
For each of the costs associated with the new product decision, indicate whether it would be variable or fixed. If it is a product cost, indicate whether it would be direct materials, direct labor or a manufacturing overhead cost. If it is not a product cost, indicate whether it is a period, opportunity or a sunk cost. Select "None" if none of the categories apply for a particular item. NOTE: Opportunity cost is a special category, and to avoid confusion, do not attempt to classify the cost in any other way except as an opportunity cost.