Cost management with an ABC systemKackle Chairs, Inc.

Cost management with an ABC system

Kackle 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. Amy Kackle, 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. Kackle.

Direct Cost per Unit

Model Diamond (D)

Model Gold (G)

Direct materials

$22 per unit

$12 per unit

Direct labor

$24/hour × 2 hours production time

$24/hour × 1 hour production time

 

Category

Estimated Cost

Cost Driver

Use of Cost Driver

Unit level Batch level Product level Facility level

$ 300,000 750,000 450,000 500,000

Number of units Number of setups Number of TV commercials Number of machine hours

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

Total

$2,000,000

 

 

The market price for office chairs comparable to Model Diamond is $114 and to Model Gold Required

a. Compute the cost per unit for both products.

b. Sam Maddox, the chief engineer, told Ms. Kackle 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

is $70. 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. Kackle adopts his suggestion.

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