ost). Then place an X under each heading that helps to describe the type of cost involved. There may be X’s under several column headings for a single cost. (For example, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost.)
Q. Several years ago, Kunja Chaya Company purchased a small building adjacent to its
manufacturing plant in order to have room for expansion when needed. Since the company had
no immediate need for the extra space, the building was rented out to another company for
rental revenue of $40,000 per year. The renter’s lease will expire next month, and rather than
renewing the lease, Kunja Chaya Company has decided to use the building itself to manufacture
a new product. Direct materials cost for the new product will total $40 per unit. It will be
necessary to hire a supervisor to oversee production. Her salary will be $2,500 per month.
Workers will be hired to manufacture the new product, with direct labor cost amounting to $18
per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to
rent space in a warehouse nearby in order to store finished units of product. The rental cost will
be $1,000 per month. In addition, the company will need to rent equipment for use introducing
the new product; the rental cost will be $3,000 per month. The company will continue to
depreciate the building on a straight-line basis, as in past years.
$10,000 per year. Advertising costs for the new product will total $50,000 per year. Costs of
shipping the new product to customers will be $10 per unit. Electrical costs of operating machines
will be $2 per unit. To have 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 $6,000 per year.
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 type
of cost involved. There may be X’s under several column headings for a single cost. (For example,
a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of
these column headings opposite the cost.)
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