Assume Sharpie, a brand of Sanford LP, is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor-intensive method. The predicted manufacturing costs for each method are as follows:

Sharpie’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.
Required

a. Determine the annual break-even point in units if Sharpie uses the:
1. Capital-intensive manufacturing method.
2. Labor-intensive manufacturing method.

b. Determine the annual unit volume at which Sharpie is indifferent between the two manufacturing methods.

c. Management wants to know more about the effect of each alternative on operating leverage.
1. Explain operating leverage and the relationship between operating leverage and the volatility of earnings.
2. Compute operating leverage for each alternative at a volume of 250,000 units.
3. Which alternative has the higher operating leverage? Why?

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Direct materials per unit. Direct labor per unit.. Variable manufacturing overhead per unit. Fixed manufacturing overhead per year... Capital Intensive $5.00 $ 5.00 $ 4.00 $2,440,000 Labor Intensive $ 6.00 $10.00 $ 2.00 $700,000