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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

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.

(a) Determine the annual break-even point in units if Paper Mate uses the: 1. Capital-intensive manufacturing method.

2. Labor-intensive manufacturing method.

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

2. Compute operating leverage for each alternative at a volume of 250,000 units. Round your answers two decimal places.

Capital-Intensive operating leverage

Labor-Intensive operating leverage

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