Leo Vinci was reviewing the product costs for his line of artist's oil paints. The current production schedule calls for the paints to be produced in batches of 1,000 tubes. Between each batch, the mixing and packaging lines must be completely cleaned to remove all remnants of color before changing to the next batch.

Currently, Leo makes 50 colors in 50,000 batches. Under the company's activity-based costing system, each batch incurs setup and cleaning charges of $50, for a total charge of $2,500,000 in setup costs. To reduce his costs in the coming year, Leo plans to increase the batch size to 2,000 tubes, which will reduce the number of required setups to 25,000.

Required:

(a) What effect will Leo's decision to increase the batch size have on his total setup costs?

(b) What effect will Leo's decision to increase the batch size have on the cost of a tube of paint?

(c) What effect will Leo's decision to increase the batch size have on other costs incurred by the company?

(d) What negative effects should Leo consider before increasing the batch size?