Alternative Production Procedures and Operating Leverage

Assume Paper Mate 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:

Capital Intensive Labor Intensive

Direct materials per unit $5.00 $6.00

Direct labor per unit $5.00 $12.00

Variable MFTG overhead per unit $4.00 $2.00

Fixed MFTG overhead per year $2,720,000.00 $860,000.00

Paper Mate's market research department has recommended an introductory unit sales price of $30. The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold.

(a) Determine the annual break-even point in units if Paper Mate uses the:

1. Capital-intensive manufacturing method.

? x units

2. Labor-intensive manufacturing method.

? x units

(b) Determine the annual unit volume at which Paper Mate is indifferent between the two manufacturing methods.

? x units

2. Compute operating leverage for each alternative at a volume of 270,000 units.Round your answers two decimal places.

Capital-Intensive operating leverage ??

Labor-Intensive operating leverage ??