Assignment
Creative Ideas Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.
Capital-Intensive Labor-Intensive
Direct materials $5 per unit $5.00 per unit
Direct labor $6 per unit $7.00 per unit
Variable overhead $3 per unit $4.00 per unit
Fixed manufacturing costs $2,322,000 $1,426,000
Creative Ideas' market research department has recommended an introductory unit sales price of $29. The incremental selling expenses are estimated to be $462,000 annually plus $2 for each unit sold, regardless of manufacturing method.
With the class divided into groups, answer the following.
(a) Calculate the estimated break-even point in annual unit sales of the new product if Creative Ideas Company uses the: (Round answers to 0 decimal places, e.g. 5,275.)
(1) Capital-intensive manufacturing method.
(2) Labor-intensive manufacturing method.
(b) Determine the annual unit sales volume at which Creative Ideas Company would be indifferent between the two manufacturing methods. (Round answer to 0 decimal places, e.g. 5,275.)