Wollogong Group Ltd. of New South Wales, Australia, acquired its factory buildin

Question

Wollogong Group Ltd. of New South Wales, Australia, acquired its factory building about 10 years ago. For several years, the company has rented out a small annex attached to the rear of the building. The company has received a rental income of $30,000 per year on this space. The renter’s lease will expire soon, and rather than renewing the lease, the company has decided to use the space itself to manufacture a new product. Direct materials cost for the new product will total $80 per unit. To have a place to store finished units of product, the company will rent a small warehouse nearby. The rental cost will be $500 per month. In addition, the company must rent equipment for use in producing the new product; the rental cost will be $4,000 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $60 per unit. The space in the annex will continue to be depreciated on a straight-line basis, as in prior years. This depreciation is $8,000 per year. Advertising costs for the new product will total $50,000 per year. A supervisor will be hired to oversee production; her salary will be $1,500 per month. Electricity for operating machines will be $1.20 per unit. Costs of shipping the new product to customers will be $9 per unit. To provide 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 about $3,000 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.

Explanation / Answer

Direct material cost     variable /    direct materials

Rental cost (warehouse) Fixed

Rental equipment        fixed / maufacturing overhead

Direct labor                 variable / direct labor

Annex dep                fixed/ manufacturing cost

Supervisor salary        Fixed / manufacturing cost

Electircity                 Variable / manufacturing cost

Cost of shipping      variable

Advertising             fixed / period cost

Revenue forgone       opportunity cost

Direct material cost     variable /    direct materials

Rental cost (warehouse) Fixed

Rental equipment        fixed / maufacturing overhead

Direct labor                 variable / direct labor

Annex dep                fixed/ manufacturing cost

Supervisor salary        Fixed / manufacturing cost

Electircity                 Variable / manufacturing cost

Cost of shipping      variable

Advertising             fixed / period cost

Revenue forgone       opportunity cost

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