Assume Paper Mate company is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor-intensive method. The estimated manufacturing costs for each method are as follows:
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 $2,440,000.00 $700,000.00
Paper Mate’s market research department has recommended an introductory unit sales price of $40. The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold.
a. Determine the annual break-even point in units if Paper Mate uses the:
i. Capital-intensive manufacturing method
ii. Labor-intensive manufacturing method
b. Determine the annual unit volume at which paper Mate is indifferent between the two manufacturing methods.
c. Management wants to know more about the effect of each alternative on operating leverage.
i. Compute operating leverage for each alterative at a volume of 250,000 units.
ii. Which alternative has the highest operating leverage? Why?