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Star Company has decided to introduce a new product, which can be manufactured by either a computer assisted manufacturing system or a labor-intensive production system. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows:

Labor-Intensive Production System

Computer-AssistedManufacturing System

Direct Material Rs. 8.40 Rs. 7.50

Direct labor 0.8DLH @ Rs.13.50 Rs.10.80 0.5DLH @ Rs.18.00 Rs. 9.00

Variable overhead 0.8DLH @ Rs.9.00 Rs. 7.20 0.5DLH @ Rs.9.00 Rs. 4.50

Fixed overhead * Rs.1,980,000 Rs.3,660,000

*These costs are directly traceable to the new product line. They would not be incurred if the new product were not produced

The company's marketing research department has recommended an introductory unit sales price of Rs.45. Selling expenses are estimated to be Rs.750,000 annually plus Rs.3 for each unit sold. (Ignore income taxes.)

Required:

1. Calculate Star's estimated break-even point in annual unit sales of the new product if the company uses the (a) labor-intensive production system; (b) computer-assisted manufacturing system.
2. Determine the annual unit sales volume at which the firm would be indifferent between the two manufacturing methods.
3. Management must decide which manufacturing method to employ. One factor it should consider is operating leverage. Explain the concept of operating leverage. How is this concept related to Star's decision?
4. Describe the circumstances under which the firm should employ each of the two manufacturing methods.
5. Identify some business factors other than operating leverage that management should consider before selecting the manufacturing method.

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