Expand Your Critical Thinking 18-1

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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-Intensive	Labor-Intensive
Direct materials	$6	per unit	$6.00	per unit
Direct labor	$7	per unit	$9.00	per unit
Variable overhead	$3	per unit	$5.00	per unit
Fixed manufacturing costs	$2,827,000	$1,736,000

Creative Ideas market research department has recommended an introductory unit sales price of $36. The incremental selling expenses are estimated to be $562,000 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-Intensive	Labor-Intensive
Break-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