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 manufactoring costs for each methond are as follows: Capital Intensive-Direct materials per unit $5.00, Direct labor per unit $5.00, Variable manufacturing overhead per unit $4.00, Fixed manufacturing overhead per year $2,440,00. Labor Intensive- Direct materials per unit $6.00. Direct labor per unit $12.00, Variable manufacturing overhead per uniit $2.00, Fixed manufacturing overhead per year $700,000. Paper Mate's Market research department has recommend an introductory unit sales price of $30. The increment 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 Paper Mate uses the: 1. Capital-intensive manufacturing method. 2. Labor-Intensive manufacturing method.

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

c. Mangement wants to know more about the eeffect of each alternative on operating leverage.

1. Explain operating leverage and the relationship betweenn 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?