Alternative Production Procedures and Operating Leverage Assume Paper Mate is planning to introduce a new executive pen...

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Accounting

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

	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

Answer & Explanation Solved by verified expert

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Question A Particulars Capital Intensive Labour Intensive Fixed Cost 2940000 1200000 Contribution Margin per Unit 24 16 Break Even Point in Units 122500 75000 Particulars Capital Intensive Labour Intensive Sales Price per Unit 40 40 Less Variable Costs per Unit 16 24 Contribution Margin per Unit 24 16 Particulars Capital Intensive Labour Intensive Direct Materials Cost per Unit 5 8 See Answer

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