Alternative Production Procedures and OperatingLeverage
Assume Paper Mate is planning to introduce a new executive pen thatcan be manufactured using either a capital-intensive method or alabor-intensive method. The predicted manufacturing costs for eachmethod are as follows:
| Capital Intensive | Labor Intensive |
|---|
| Direct materials per unit | $ 5.00 | $ 8.00 |
| Direct labor per unit | $ 5.00 | $ 12.00 |
| Variable manufacturing overhead per unit | $ 4.00 | $ 2.00 |
| Fixed manufacturing overhead per year | $ 2,440,000 | $ 700,000 |
Paper Mate's market research department has recommended anintroductory unit sales price of $40. The incremental selling costsare predicted to be $500,000 per year, plus $2 per unit sold.
(a) Determine the annual break-even point in units if Paper Mateuses the:
1. Capital-intensive manufacturing method.
2. Labor-intensive manufacturing method.
(b) Determine the annual unit volume at which Paper Mate isindifferent between the two manufacturing methods.
2. Compute operating leverage for each alternative at a volumeof 250,000 units. Round your answers two decimal places.
Capital-Intensive operating leverage
Labor-Intensive operating leverage
