• +1-617-874-1011 (US)
  • +44-117-230-1145 (UK)
Live Chat
Follow Us:

Mini case 1 chapter 2

Thom Lee has invented a new design for campfire tongs. Thom believes the potential for his new product huge and has decided to leave his $2,600 per month job as a call centre manager to produce and sell the campfire tongs through his new company, ExtendaTong. Thom will rent factory space that will be used to produce the new product. The rent will be $1,200 per month and he will rent production equipment at a cost of $900 per month.

The cost of materials for each campfire tong will be $13.50. Production employees will be hired to assemble the campfire tongs. They will be paid $3.10 for each completed unit. Thom will rent a small suite in an office building for use as his sales office. The rent will be $800 per month. An important part of his strategy is to keep costs low. This is accomplished by hiring a part-time purchasing agent to search for low-cost sources of materials (steel and wood) used in the production of the campfire tongs. This person will be paid $1,500 per month. In addition, he has added voice messaging to his cellphone plan to get after-hours messages from customers. The addition of voice messaging will increase his monthly cellphone bill by $8.

Thom keeps surplus cash in a high-interest savings account in which he earns on average $1,600 per year. The business requires an up-front cash investment by Thom, who will use the balance in his high-interest savings account to address this need. To sell his tongs, he will use the local newspaper to advertise in the local area. The advertising costs will be $300 per month. In addition, he will pay a sales commission of $0.90 for each tong sold. No salary will be taken by Thom in the foreseeable future. He has already paid the legal and filing fees to incorporate his business. These fees amounted to $750.

Required:

  1. Create a table with columns labelled with appropriate cost classifications (see below). Include the relevant cost in the Description column and use an X to indicate the appropriate cost classification (note: most belong to more than one category).

Product Cost

Description/($)

Variable Cost

Fixed Cost

Direct Materials

Direct Labour

Mfg.

Overhead

Sell. & Admin.

Opportunity

Cost

Sunk Cost

Call Centre Manager Job

$2600

Factory Space

$1200

$1200

Production Equipment

$900

$900

Materials

$13.50

$13.50

Tongs Assembler

$3.10

$3.10

Office Building

$800

$800

Purchasing Agent

$1500

$1500

Phone Bill

$8

$8

Saving Account

$1600

$1600

Advertising cost

$300

$300

Commission

$0.90

$0.90

Legal Fee

$750

No Salary taken by Thom

$0