18-1
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 | $6 | per unit | $6.50 | per unit | ||
| Direct labor | $7 | per unit | $9.00 | per unit | ||
| Variable overhead | $4 | per unit | $5.50 | per unit | ||
| Fixed manufacturing costs | $2,978,000 | $1,829,000 | ||||
Creative Ideas’ market research department has recommended an introductory unit sales price of $38. The incremental selling expenses are estimated to be $592,000 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. |
| Capital-Intensive | Labor-Intensive | |||
| Break-even point in units |  |
|
(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.)
| Annual unit sales volume |
|
units |
