Problem: CP 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:
Computer assisted Labor intensive
Direct material......................................$5.00...............................................$5.60
Direct labor(DLH denotes direct
labor hours).................................0.5DLH@$12...6.00............0.8DLH@$9......7.20
Variable overhead.........................0.5DLH@ $6...3.00..............0.8DHL@$6....4.80
Fixed overhead.....................................$2,440,000....................$1,320,000
The company's marketing research dept has recommended an introductory unit sales price of $30. Selling expenses are estimated to be $500,000 annually plus $2 for each unit sold.
Q1. Calculate the estimated break even point in annual unit sales of the new product if the company uses a. computer assisted manufacturing system or b. labor intensive production system.
Q2. Determine the annual unit sales volume at which the firm would be indifferent between the tow manufacturing methods.