Sonam.C
Mar 26, 2012, 10:52 AM
Galliano Company has decided to introduce a new product. The new product can be manufactures by either a capital-intensive method or 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 $5.50 per unit
Direct labor $ 6 per unit $ 8.00 per unit
Variable overhead $ 3 per unit $ 4.50 per unit
Fixed Manufacturing costs $ 2,508,000 $ 1,538,000
Galliano's market research department has recommended an introductory unit sales price of $30. The incremental selling expenses are estimated to be $ 502,000 annually plus $2 for each unit sold, regardless of manufacturing method.
Required:
A) Calculate the estimated break-even point in annual unit sales of the new product if Galliano Company uses the:
I. Capital-intensive manufacturing method.
Ii. Labor-intensive manufacturing method.
B) Determine the annual unit sales volume at which Galliano Company would be indifferent between the two manufacturing method.
C) Explain the circumstances under which Galliano should employ each of the two manufacturing methods.
Capital-Intensive Labor-Intensive
Direct Materials $ 5 per unit $5.50 per unit
Direct labor $ 6 per unit $ 8.00 per unit
Variable overhead $ 3 per unit $ 4.50 per unit
Fixed Manufacturing costs $ 2,508,000 $ 1,538,000
Galliano's market research department has recommended an introductory unit sales price of $30. The incremental selling expenses are estimated to be $ 502,000 annually plus $2 for each unit sold, regardless of manufacturing method.
Required:
A) Calculate the estimated break-even point in annual unit sales of the new product if Galliano Company uses the:
I. Capital-intensive manufacturing method.
Ii. Labor-intensive manufacturing method.
B) Determine the annual unit sales volume at which Galliano Company would be indifferent between the two manufacturing method.
C) Explain the circumstances under which Galliano should employ each of the two manufacturing methods.