Heritage Company manufactures a beautiful bookcase that enjoys widespread popularity.

Heritage Company manufactures a beautiful bookcase that enjoys widespread popularity. The company has a backlog of orders that is large enough to keep production going indefinitely at the plant's full capacity of 4,000 bookcases per year. Annual cost data at full capacity follow:

Direct materials used (wood and glass)	$	430,000
Administrative office salaries	$	110,000
Factory supervision	$	70,000
Sales commissions	$	60,000
Depreciation, factory building	$	105,000
Depreciation, administrative office equipment	$	2,000
Indirect materials, factory	$	18,000
Factory labor (cutting and assembly)	$	90,000
Advertising	$	100,000
Insurance, factory	$	6,000
Administrative office supplies (billing)	$	4,000
Property taxes, factory	$	20,000
Utilities, factory	$	45,000

Required:

1.

Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold; and second, as either 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.) (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

	Cost Behavior		Selling or Administrative	Product Cost
Cost Item	Variable	Fixed	Cost	Direct	Indirect
Direct materials used (wood, glass)	$	$	$	$	$
Administrative office salaries
Factory supervision
Sales commissions
Depreciation, factory building
Depreciation, admin. office equipment
Indirect materials, factory
Factory labor (cutting and assembly)
Advertising
Insurance, factory
Administrative office supplies (billing)
Property taxes, factory
Utilities, factory
Total costs	$	$	$	$	$

2.	Compute the average product cost per bookcase. (Omit the "$" sign in your response.)

Average product cost

$

per bookcase

3.	Due to a recession, assume that production drops to only 2,000 bookcases per year. Would you expect the average product cost per bookcase to increase, decrease, or remain unchanged?
	Increase

Explanation:

2.

The average product cost per bookcase will be:

Direct	$ 520,000
Indirect	264,000
Total	$ 784,000

$784,000 ÷ 4,000 bookcases = $196 per bookcase

3.

The average product cost per bookcase would increase if the production drops. This is because the fixed costs would be spread over fewer units, causing the average cost per unit to rise.