Problem 7-44 Break-Even Analysis; Operating Leverage; New Manufacturing Environment (LO 7-1, 7-8, 7-10)

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Celestial Products, Inc., has decided to introduce a new product, which can be manufactured by either a computer-assisted manufacturing system or a labor-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 SystemLabor-Intensive

Production SystemDirect material$7.70$8.60Direct labor (DLH denotes direct-labor hours)0.5DLH @ $19.009.500.8DLH @ $14.5011.60Variable overhead0.5DLH @ $10.005.000.8DLH @ $10.008.00Fixed overhead*$3,760,000$2,080,000

*These costs are directly traceable to the new product line. They would not be incurred if the new product were not produced.

The company's marketing research department has recommended an introductory unit sales price of $49.00. Selling expenses are estimated to be $770,000 annually plus $3.20 for each unit sold. (Ignore income taxes.)

Problem 7-44 Part 2

2.Determine the annual unit sales volume at which the firm would be indifferent between the two manufacturing methods.(

3.determine the annual unit sales volume at which the firm would be indifferent between the the two manufacturing methods?

Management must decide which manufacturing method to employ. One factor it should consider is operating leverage. explain the concept of operating leverage. How is this concept related to celestial products decision?

Describe the circumstances under which the firm should employ each of the two manufacturing methods?

Identify some business factors other operating leverage that management should considered before selecting the manufacturing method.