Case 3 Velvel Company is evaluating two methods of making digital tape players/recorders. A cost analyst for the firm has prepared the following comparative cost data for the two alternatives: Method 1 Method 2 $ $ 39 45 12 27 Direct materials Direct labor Variable overhead Annual fixed manufacturing cost Sales price 210,000 110 90,000 110 The company makes the tape drive units which are part of the player/recorder. Similar tape drive units that can be used in the manufacture of the player/recorder can be purchased for $20 each. All fixed costs of making the tape drives are sunk costs. The company expects to produce 5,000 players/recorders per year. Data on the production of 5,000 tape drives are as follows: Total Cost Direct materials Direct labor Manufacturing overhead (75% fixed) Variable administrative cost Total $ 25,000 30.000 60,000 10.000 $ 125,000 Required: 1. Compute the cost indifference point for the players/recorders. 2. Determine which method should be used to manufacture the players/recorders. Decide if the company should buy the tape drives or continue making them. 3