Staci Valek began dabbling in pottery several years ago as a hobby. Her work is quite creative and it has been so popular with friends and others that she has decided to quit her job with an aerospace company and manufacture pottery full time. Staci's aerospace job is $3,800 per month.
She will rent a small building near her home to use as a place for manufacturing the pottery. The rent will be $500/month. She estimates that the cost of clay and glaze will be $2 for each finished piece of pottery. She will hire workers to produce the pottery at a labor of $8 per pot. To sell her pots, Staci feels she must advertise heavily in the local area. An advertising agency states that it will handle all advertising for a fee of $600 per month. Her bother will sell the pots; he will be pots a commission of $4 for each pot sold. Equipment needed to manufacture the pots will be rented at a cost of $300 per month.
Staci has already paid the legal and filing fees associated with incorporating her business in the state. These fees amounted to $500. A small room has been located in a tourist area that Staci will use as a sales office, the rent will be $250 a month. A phone is installed in the room for taking orders will cost $40 per month. In addition, a recording device will be attached to the phone for taking after-hour messages.
Staci has some money in savings that is earning interest of $1,200 per year. These savings will be withdrawn and used to get the business going. For the time being, Staci does not intend to draw any salary from the new company.
1. Prepare an answer sheet with the following column headings:
-- Name of the cost
-- Variable costs
-- Fixed Cost
-- Direct Materials
-- Direct Labor
-- Manufacturing Overhead
-- Period (Selling and Administrative Cost)
-- Opportunity Cost
-- Sunk Cost
List the different costs associated with the new company down the extreme left column, (under name of cost). Then place an X under each heading that helps to describe the type of cost involved. There many be X's under several column headings for a single cost. That is, a cost may be fixed cost, a period cost and a sunk cost; you would place an X under each of these columns headings opposite the cost.
Under the variable cost column, list only those costs that would be variable with respect to the numbers of units of poetry that are produced and sold.
2. All of the costs you have listed above, except one, would be differential costs between the alternatives of Staci producing pottery or staying with the aerospace company. Which cost is NOT differential? Explain.