Question

Stuart Chairs, Inc. makes two types of chairs. Model Diamond is a high-end product designed for professional offices. Model Gold is an economical product designed for family use. Jane Silva, the president, is worried about cut-throat price competition in the chairs market. Her company suffered a loss last quarter, an unprecedented event in its history. The company’s accountant prepared the following cost data for Ms. Silva:

Direct Cost per Unit	Model Diamond (D)						Model Gold (G)
Direct materials				$	20.80	per unit				$	9.50	per unit
Direct labor	$	18.60	/hour	×	2.00	hours production time	$	18.60	/hour	×	1.00	hour production time

Category	Estimated Cost					Cost Driver	Use of Cost Driver
Unit level		$	253,000			Number of units	D: 10,000 units; G: 36,000 units
Batch level			1,053,000			Number of setups	D: 112 setups; G: 158 setups
Product level			897,000			Number of TV commercials	D: 6; G: 17
Facility level			416,000			Number of machine hours	D: 1,600 hours; G: 3,600 hours
Total		$	2,619,000

The market price for office chairs comparable to Model Diamond is $119 and to Model Gold is $72.

Required

1. Compute the cost per unit for both products.

2. Dan Barker, the chief engineer, told Ms. Silva that the company is currently making 89 units of Model Diamond per batch and 228 units of Model Gold per batch. He suggests doubling the batch sizes to cut the number of setups in half, thereby reducing the setup cost by 50 percent. Compute the cost per unit for each product if Ms. Silva adopts his suggestion.

Answer 1

1.

Category	Estimated cost	Cost driver	Activity rate	Model Diamond (D)	Model Gold (G)
Unit level	$253,000	46,000	$5.5	$55,000	$198,000
Batch level	1,053,000	270	3,900	436,800	616,200
Product level	897,000	23	39,000	234,000	663,000
Facility level	416,000	5,200	80	128,000	288,000
Total	$2,619,000			$853,800	$1,765,200

	Model Diamond (D)	Model Gold (G)
Direct material	$208,000 (10,000*$20.80)	$342,000 (36,000*$9.5)
Direct labor	372,000 (10,000*2*$18.60)	669,600 (36,000*$18.60)
Overhead	853,800	1,765,200
Total cost	$1,433,800	$2,776,800
Cost per unit	$143.38 (1,433,800/10,000)	$77.13 (2,776,800/36,000)

2.

Category	Activity rate	Model Diamond (D)	Model Gold (G)
Unit level	$5.5	$55,000	$198,000
Batch level	3,900	218,400 (3,900*112*50%)	308,100 (3,900*158*50%)
Product level	39,000	234,000	663,000
Facility level	80	128,000	288,000
Total		$635,400	$1,457,100

	Model Diamond (D)	Model Gold (G)
Direct material	$208,000 (10,000*$20.80)	$342,000 (36,000*$9.5)
Direct labor	372,000 (10,000*2*$18.60)	669,600 (36,000*$18.60)
Overhead	635,400	1,457,100
Total cost	$1,215,400	$2,468,700
Cost per unit	$121.54 (1,215,400/10,000)	$68.575 (2,468,700/36,000)