Break-even point and cost indifference point In January Peguales Company will start production of a new 2-horsepower outboard motor for use on canoes and as trolling motors.

A major unresolved issue is the type of production operation that will be used in manufac- turing the motors. The production manager favors a highly automated system that minimizes the number of manual assembly operations. This system has a much higher initial cost and higher maintenance cost. But it is a very efficient system that has low labor cost and efficient use of raw materials. The chief financial officer of Peguales prefers a more modest initial investment which requires much more manual assembly of the outboard motors. She believes it is wise to see how well the 2 horsepower outboards sell before committing a significant amount of resources to its manufacturing facilities. The motors will sell for $300 each. The table on the next page shows estimated cost data for the two production alternatives.

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REQUIRED a. Compute the cost indifference point for the two assembly alternatives. b. Compute the break-even point for both alternatives. c. If expected sales of the 2-horsepower motors are 6,000 units, what assembly method would you recommend? d. If management decides to raise the motor price 10 percent, what impact does this decision have on the cost indifference point you computed in part a?