Campbell Chairs, Incorporated 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 $ 19.10 per unit $9.40 per unit
Direct labor $ 18.20/hour × 2.00 hours production time $ 18.20/hour × 1.00 hour production time


Category Estimated Cost Cost Driver Use of Cost Driver
Unit level $ 296,100 Number of units D: 13,000 units; G: 34,000 units
Batch level 756,000 Number of setups D: 106 setups; G: 164 setups
Product level 608,000 Number of TV commercials D: 7; G: 12
Facility level 826,000 Number of machine hours D: 1,600 hours; G: 4,300 hours
Total $ 2,486,100


The market price for office chairs comparable to Model Diamond is $117 and to Model Gold is $72.


Required

a. Compute the cost per unit for both products.

b. Dan Barker, the chief engineer, told Ms. Silva that the company is currently making 123 units of Model Diamond per batch and 207 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.