CT18-1 Creative Ideas Company has decided to introduce a new product. The new product can be manufactured by either a capitalintensive method or a laborintensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.

	CapitalIntensive	LaborIntensive
Direct materials	$5 per unit	$5.50 per unit
Direct labor	$6 per unit	$8.00 per unit
Variable overhead	$3 per unit	$4.50 per unit
Fixed manufacturing costs	$2,524,000	$1,550,000

Creative Ideas' market research department has recommended an introductory unit sales price of $32. The incremental selling expenses are estimated to be $502,000 annually plus $2 for each unit sold, regardless of manufacturing method.

Instructions

With the class divided into groups, answer the following.

(a) Calculate the estimated breakeven point in annual unit sales of the new product if Creative Ideas Company uses the:

(1) Capitalintensive manufacturing method.

(2) Laborintensive manufacturing method.

(b) Determine the annual unit sales volume at which Creative Ideas Company would be indifferent between the two manufacturing methods.

(c) Explain the circumstance under which Creative Ideas should employ each of the two manufacturing methods.

(CMA adapted)