Question

Adams 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 Direct materials Direct labor Model Diamond (D) $21.10 per unit $17.50/hour x 2.00 hours production time Model Gold (G) $9.70 per unit $17.50/hour *1.00 hour production time Category Unit level Batch level Product level Facility level Total Estimated Cost $ 324,300 672,000 768,000 369,000 $2,133,300 Cost Driver Number of units Number of setups Number of TV commercials Number of machine hours Use of Cost Driver D: 14,000 units; G: 33,000 units D: 106 setups; G: 174 setups D: 6; G: 18 D: 1,600 hours; G: 2,500 hours The market price for office chairs comparable to Model Diamond is $117 and to Model Gold is $80. 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 132 units of Model Diamond per batch and 190 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. (For all requirements, round intermediate calculations and final answers to 2 decimal places.)

Answer 1

Calculation of cost per unit
				Diamond		Gold
Cost Pool	Estimated cost	Total Driver	Activity Rate = Overheads/Driver	Driver Consumed	Overhead assigned = Driver consumed*Rate	Driver Consumed	Overhead assigned = Driver consumed*Rate
Unit Level	324,300	47,000	7	14,000	96,600	33,000	227,700
Batch Level	672,000	280	2,400	106	254,400	174	417,600
Product Level	768,000	24	32,000	6	192,000	18	576,000
Facility Level	369,000	4,100	90	1,600	144,000	2,500	225,000
				Total	687,000		1,446,300
				Number of Units	14,000		33,000
				Overhead cost per unit	49.07		43.83
Cost per unit
	Diamond	Gold
Direct material	21.1	9.7
Direct labor	35	17.5
Overhead	49.07	43.83
Cost per unit	105.1714286	71.02727273

Calculation of cost per unit
				Diamond		Gold
Cost Pool	Estimated cost	Total Driver	Activity Rate = Overheads/Driver	Driver Consumed	Overhead assigned = Driver consumed*Rate	Driver Consumed	Overhead assigned = Driver consumed*Rate
Unit Level	324,300	47,000	7	14,000	96,600	33,000	227,700
Batch Level	336,000	140	2,400	53	127,200	87	208,800
Product Level	768,000	24	32,000	6	192,000	18	576,000
Facility Level	369,000	4,100	90	1,600	144,000	2,500	225,000
				Total	559,800		1,237,500
				Number of Units	14,000		33,000
				Overhead cost per unit	39.99		37.50
Cost per unit
	Diamond	Gold
Direct material	21.1	9.7
Direct labor	35	17.5
Overhead	39.99	37.50
Cost per unit	96.08571429	64.7
Price	124.91	84.11