Question : Play For Fun Berhad has decided to introduce a new product. The product can be manufactured using either a machine-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows:
Machine intensive Labor intensive
Variable manufacturing cost per unit .................... $14.00 $17.60
Fixed manufacturing cost per year ......................... $2,440,000 $1,320,000
The company's market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative expenses of the new product are $500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured.
Required:
a) Calculate the break-even point in units if Play For Fun Berhad uses the:
i. machine-intensive manufacturing method.
ii. labor-intensive manufacturing method.
b) Determine the unit sales volume at which the net operating income is the same for the two manufacturing methods.
c) Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the:
i. machine-intensive manufacturing method.
ii. labor-intensive manufacturing method.
d) What is your recommendation to management concerning which manufacturing method should be used?