Candice Corporation has decided to introduce a new product. The product can be manufactured using either a capital intensive or labor intensive method. The estimated manufacturing costs of the two methods are as follows:
Capital Labor
Intensive Intensive
Variable manufacturing cost per unit $14 $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.
Candice Corporation questions:
Calculate the breakeven point in units if Candice corporation uses the :
Capital intensive manufacturing method
Labor intensive manufacturing method
Determine the unit sales volume at which the net operating income is the same for the two manufacturing methods.
Assuming sales of 250,000 units, what is the degree of operating leverage if the company uses the
Capital intensive manufacturing method
Labor intensive manufacturing method
