PLEASE NO HANDWRITING ANSWERS Toledo Tool Company plans to introduce a new product The company also considers adopting a new computer assisted manufacturing system The new product can be manufactured by either the new computer assisted system or its traditional labor intensive production system The company can achieve the same quality of the product regardless of which the production system employed The estimated product costs by the two production systems are as follows Traditional Labor Intensive Production Systems New Computer Assisted Manufacturing Systems Direct Material (per unit) $10 5 $8 4 Direct Labor (per unit) $14 0 $9 0 Variable overhead (per unit) $5 5 $3 4 Fixed overhead $2M $3 5M The marketing department recommends that the unit selling price of the new product be at $65, and the company expects the selling expenses for the new product to be $830,000 annually plus $4 for each unit sold The company is currently subject to a 40 income tax rate As a production manager, you must decide which production system should be used One factor you should consider is operating leverage How is the operating leverage concept related to your decision

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PLEASE NO HANDWRITING ANSWERS Toledo Tool Company plans to introduce a new product. The company also considers adopting a new computer-assisted manufacturing system. The new

PLEASE NO HANDWRITING ANSWERS

Toledo Tool Company plans to introduce a new product. The company also considers adopting a new computer-assisted manufacturing system. The new product can be manufactured by either the new computer assisted system or its traditional labor-intensive production system. The company can achieve the same quality of the product regardless of which the production system employed.

The estimated product costs by the two production systems are as follows:

	Traditional Labor-Intensive Production Systems	New Computer-Assisted Manufacturing Systems
Direct Material (per unit)	$10.5	$8.4
Direct Labor (per unit)	$14.0	$9.0
Variable overhead (per unit)	$5.5	$3.4
Fixed overhead	$2M	$3.5M

The marketing department recommends that the unit selling price of the new product be at $65, and the company expects the selling expenses for the new product to be $830,000 annually plus $4 for each unit sold. The company is currently subject to a 40% income tax rate.

As a production manager, you must decide which production system should be used. One factor you should consider is operating leverage. How is the operating leverage concept related to your decision?