The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The company has enough customer demand to justify producing its full capacity of 3,800 sets per year. Annual cost data at full capacity follow:Direct labor $89,000Advertising $101,000Factory supervision $66,000Property taxes, factory building $20,000Sales commissions $63,000Insurance, factory $7,000Depreciation, administrative office equipment $3,000Lease cost, factory equipment $15,000Indirect materials, factory $20,000Depreciation, factory building $108,000Administrative office supplies (billing) $5,000Administrative office salaries $111,000Direct materials used (wood, bolts, etc.)$425,000Utilities, factory $40,0001. Enter the dollar amount of each cost item under the appropriate headings. 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.)2. 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?

1. The dollar amount of each cost item is entered under the appropriate headings as follows:

                                                             Fixed    Variable      Selling &   Product

                                                             Costs      Costs     Admin Cost    Cost

Direct labor                                                     $89,000                          $89,000

Advertising                                     $101,000                       $101,000

Factory supervision                       $66,000                                          $66,000

Property taxes, factory building   $20,000                                          $20,000

Sales commissions                                        $63,000        $63,000

Insurance, factory                           $7,000                                             $7,000

Depreciation, administrative

   office equipment                       $3,000                           $3,000

Lease cost, factory equipment   $15,000                                            $15,000

Indirect materials, factory                            $20,000                          $20,000

Depreciation, factory building $108,000                                           $108,000

Administrative office supplies (billing)         $5,000          $5,000

Administrative office salaries    $111,000                          $111,000

Direct materials used (wood, bolts, etc.)$425,000                         $425,000

Utilities, factory                         $40,000                                             $40,000

Total costs                              $471,000 $602,000     $283,000  $790,000

2. The average product cost per set is $207.89 ($790,000/3,800).

3. If the Dorilane Company's production level drops to 1,000 sets annually, the average product cost per set will increase.

Thus, if the production level reduces to 1,000 sets annually, the average product cost will not decrease or remain unchanged, but will increase to $790.

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