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

$ 8.00

Direct labor per unit

$ 5.00

$ 12.00

Variable manufacturing overhead per unit

$ 4.00

$ 2.00

Fixed manufacturing overhead per year

$ 2,440,000

$ 700,000

Paper Mate'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.