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. Answer 93,846 units is incorrect

2. Labor-intensive manufacturing method.

Answer 38,889 units is incorrect

(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. Answer choices are either A or B.

A. They have little or no correlation because they are unrelated.

B. They are positively correlated, with increases in operating leverage accompanied by increases in the volatility of earnings.

They are negatively correlated, with increases in operating leverage accompanied by decreases in the volatility of earnings. This choice is incorrect.

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

Capital-Intensive operating leverage Answer 1.6 is incorrect

Labor-Intensive operating leverage Answer 1.18 is incorrect