Silva 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 $20.60 per unit $9.80 per unit
Direct labor $18.00 /hour × 2.00 hours production time $18.00 /hour × 1.00 hour production time
Category Estimated Cost Cost Driver Use of Cost Driver
Unit level $329,400 Number of units D: 15,000 units; G: 39,000 units
Batch level 1,216,000 Number of setups D: 102 setups; G: 218 setups
Product level 800,000 Number of TV commercials D: 7; G: 13
Facility level 400,000 Number of machine hours D: 1,600 hours; G: 3,400 hours
Total $2,745,400

Required:
a. Compute the cost per unit for both products.
b. Silva Chairs, Inc, the chief engineer, told Ms. Silva that the company is currently making 147 units of Model Diamond per batch and 179 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.