Broadening Your Perspective 5-1

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Creative Ideas Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.

Capital-IntensiveLabor-IntensiveDirect materials$6per unit$6.50per unitDirect labor$7per unit$9.00per unitVariable overhead$3per unit$5.00per unitFixed manufacturing costs$2,877,000$1,767,000

Creative Ideas' market research department has recommended an introductory unit sales price of $36. The incremental selling expenses are estimated to be $572,000 annually plus $2 for each unit sold, regardless of manufacturing method.

With the class divided into groups, answer the following.

(a)

Calculate the estimated break-even point in annual unit sales of the new product if Creative Ideas Company uses the:(Round answers to 0 decimal places, e.g. 5,275.)

(1)Capital-intensive manufacturing method.(2)Labor-intensive manufacturing method.

Capital-IntensiveLabor-IntensiveBreak-even point in units

(b)

Determine the annual unit sales volume at which Creative Ideas Company would be indifferent between the two manufacturing methods.(Round answer to 0 decimal places, e.g. 5,275.)

Annual unit sales volume

units