Question: Cost Concepts
Bill Pope has developed a new device that is so exciting he is considering quitting his job in order to produce and market it on a large-scale basis. Bill will rent a garage for $300 per month for production purposes. Utilities will cost $40 per month. Bill has already taken an industrial design course at the local community college to help prepare for this venture. The course cost $300. Bill will rent production equipment at a monthly cost of $800. He estimates the material cost per unit will be $5, and the labour cost will be $3. He will hire workers and spend his time promoting the product. To do this he will quit his job, which pays $3,000 per month. Advertising and promotion will cost $900 per month.
Required: Complete the chart below by placing an "X" under each heading that helps to identify the cost involved. There can be "Xs" placed under more than one heading for a single cost, e.g., a cost might be a sunk cost, an overhead cost and a product cost; there would be an "X" placed under each of these headings opposite the cost.
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Opportunity Cost
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Sunk Cost
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Variable Cost
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Fixed Cost
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Manuf. Overhead
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Product Cost
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Selling Cost
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Differential Cost*
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General rent
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Utilities
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Cost of the industrial design course
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Equipment rented
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Material cost
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Labour cost
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Present salary
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Advertising
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*Between the alternatives of going into business to make the device or not going into business to make the device.