Several years ago Medex Company purchased a small buildingadjacent to its manufacturing plant in order to have room forexpansion when needed. Since the company had no immediate need forthe extra space, the building was rented out to another company fora rental revenue of $40,000 per year. The renter's lease willexpire next month, and rather than renew the lease, Medex Companyhas decided to use the building itself to manufacture a newproduct.
Direct materials cost for the new product will total $40 perunit. It will be necessary to hire a supervisor to overseeproduction. Her salary will be $2,500 per month. Workers will behired to manufacture the new product, with direct labor costamounting to $18 per unit. Manufacturing operations will occupy allof the building space, so it will be necessary to rent space in awarehouse nearby in order to store finished units of product. Therental cost will be $1,000 per month. In addition, the company willneed to rent equipment for use in producing the new product; therental cost will be $3,000 per month. The company will continue todepreciate 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 peryear. Costs of shipping the new product to customers will be $10per unit. Electrical costs of operating machines will be $2 perunit.
To provide funds to purchase materials, meet payrolls, and soforth, the company will have to liquidate some temporaryinvestments. These investments are presently yielding a return of$6,000 per year.
Required:
Prepare an answer sheet with the following column headings:
| Name of |
Variable |
Fixed |
Direct |
Direct |
Manufacturing |
Period (selling& |
Opportunity |
Sunk |
| the Cost |
Cost |
Cost |
Materials |
Labor |
Overhead |
administrative) cost |
cost |
cost |
List the different costs associated with the new product decision down the extreme left column (under Name of the Cost).Then place an X under each heading that helps to describe the typeof cost involved. There may be X's under several columnheadings for a single cost. (For example, a cost may be a fixedcost, a period cost, and a sunk cost; you would place an X undereach of these column headings opposite the cost).