PROBLEM 2 Laco Company acquired its factory building about 2

PROBLEM 2: Laco Company acquired its factory building about 20 years ago. For a number of years the company has rented out a small, unused part of the building. The renter\'s lease will expire soon. Rather than renewing the lease, Laco Company is considering using the space itself to manufacture a new product. Under this option, the unused space will continue to be depreciated on a straight line basis, as in past years. Direct materials and direct labor cost for the new product would be $50 per unit. In order to have a place to store finished units of the new product, the company would have to rent a small warehouse nearby. The rental cost would be $2,000 per month. It would cost the company an additional $4,000 each month to advertise the new product. A new production supervisor would be hired to oversee production of the new product who would be paid $3,000 per month. The company would pay a sales commission of $10 for each unit of product that is sold. Complete the chart below by placing an \"X\" under each column heading that helps to identify the costs listed to the left. There can be \"X\'s\" placed under more than one heading for a single cost. Rent on unused fac ?? ciation on the factory space Direct materials and direct labor Rental cost of the small warehouse Advertising cost Production su Sales commissions s sala Between the alternatives of (1) renting the space out again or (2) using the space to produce the new product.

Solution

Explanation:

1. Rent on unused factory space is an opportunity cost as when the factory space is used for the purpose of manufacturing a new product the company will have to forego its rental income. This is also a differential cost as when factory space is used for own purpose the rental income is lost.

2. Depreciation on factory space is a fixed cost as the amount will be fixed per year under the straight line method. It is also a product cost as it will be a part of factory overhead. Lastly it will be a differential cost as this cost would not have been there if factory space is given on rent.

3. Direct materials and direct labor are variable costs and depends on quantity manufactured. They are product costs as well as they are incurred while manufacturing the product.

4. Rental cost of small warehouse is a fixed cost as it entails a fixed expense of $2,000 per month. The warehouse is used for storing finished goods and so it will not be a product cost but a period costs. It will also be a part of selling and administrative expenses as the warehouse stores finished goods and hence help in the sale of finished goods later on.

5.   Advertising cost is also a fixed cost as it entails a fixed expense of $4,000 per month. This cost helps to promote the product and increase its sales and hence it is also a selling expense.

6. Production supervisor’s salary s also a fixed cost as it entails a fixed expense of $3,000 per month. This cost is a product cost as it will be regarded as an indirect labor cost and hence will be a part of factory overhead.

7. Sales commissions are a variable cost as it is directly related to number of units sold. This cost helps to augment sales and hence it is also a selling expense.

	Opportunity cost	Sunk cost	Variable cost	Fixed cost	Product cost	Selling & administrative cost	Differential cost
Rent on unused factory space	X						X
Depreciation on the factory space				X	X		X
Direct materials and direct labor			X		X
Rental cost of small warehouse				X		X
Advertising cost				X		X
Production supervisor\'s salary				X	X
Sales commissions			X			X