Evman Company has decided to introduce a new product, which can be manufactured by either a computer-assisted manufacturing system or a labour-intensive production system. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows:

	computer-assisted manufacturing system	labour-intensive production system
Direct Material	$5.00	$5.60
Direct Labour	.5DLH @ $12 $6.00	.8 DLH @ $9 $7.20
Variable Overhead	.5 DLH @ $6 $3.00	.8 DLH @ $6 $4.80
Fixed Overhead *	$2,440,000	$1,320,000

These costs are directly traceable to the new product line. They would not be incurred if the new product were not produced. The companys marketing research department has recommended an introductory sales price of $30. Selling expenses are estimated to be $500,000 annually plus $2 for each unit sold. (Ignore income taxes)

REQUIRED

Calculate the estimated break-even point in annual unit sales of the new product if the company uses the (a) computer-assisted manufacturing system; (b) labour-intensive production system

(3 marks)

-

Determine the annual unit sales volume at which the firm would be indifferent between the two manufacturing methods. (i.e. at which they both yield the same profit). (2 marks)

Prepare a profit-volume graph for these two methods, and then comment at which levels of activity the one production method would be preferred over the other. (3 marks)