Fazel 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. Irene Fazel, 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. Fazel. 

.:.

The market price for office chairs comparable to Model Diamond is $118 and to Model Gold is $73. 

Required

a. Compute the cost per unit for both products.

b. Judson Regland, the chief engineer, told Ms. Fazel that the company is currently making 150 units of Model Diamond per batch and 245 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. Fazel adopts his suggestion.

c. Is there any side effect if Ms. Fazel increases the production batch size by 100 percent? 

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Direct Cost per Unit Model Diamond (D) Model Gold (G) $20 per unit $18/hour x 2 hours production time Cost Driver Direct materials Direct labor $10 per unit $18/hour x 1 hour production time Use of Cost Driver D: 15,000 units; G: 35,000 units D: 104 setups; G: 146 setups D: 5; G: 10 D: 1,500 hours; G: 3,500 hours Estimated Cost Category Unit level Batch level Product level Facility level Total Number of units Number of setups Number of TV commercials Number of machine hours $ 300,000 450,000 500,000 $2,000,000