Question

3) Volare, Inc. has decided to introduce a new product. The product can be manufactured using either a capital-intensive or labor-intensive method. The manufacturing method will not affect the quality or sales of the product. The estimated manufacturing costs of the two methods are as follows: Capital-Intensive Variable manufacturing cost per unit $ 14.00 Fixed manufacturing cost per year $ 2,440,000 Labor-Intensive $ 17.60 $ 1,320,000 The company's market research department has recommended an introductory selling price of $30 per unit for the new product. The annual fixed selling and administrative costs of the new product are $500,000. The variable selling and administrative costs are $2 per unit regardless of how the new product is manufactured. Required: a. Calculate the break-even point in units if Volare, Inc. uses the: 1. capital-intensive manufacturing method. 2. labor-intensive manufacturing method. b. Determine the unit sales volume at which the operating profit is the same for the two manufacturing methods. c. What is your recommendation to management concerning which manufacturing method to use? please type on word not by writing hands

Answer 1

Requirement 1:

	Capital Intensive	Labor Intensive
Fixed Manufacturing Cost	$ 2,440,000.00	$ 1,320,000.00
Fixed Selling & Admin Cost	$ 500,000.00	$ 500,000.00
Total Fixed Cost	$ 2,940,000.00	$ 1,820,000.00
Selling Price per Unit	$              30.00	$              30.00
Less: Variable Manufacturing Cost	$              14.00	$              17.60
Variable Selling & Admin Cost	$                2.00	$                2.00
Contribution Margin per Unit	$              14.00	$              10.40
Break Even Point (Units)*	210,000 units	175,000 units

*Break Even Point (Units) = Total Fixed Cost / Contribution Margin per unit

Requirement 2:

Let the Unit sales be X

$14X - $2,940,000 = $10.40X - $1,820,000

$14X - $10.40X = $2,940,000 - $1,820,000

$3.60X = $1,120,000

X = $1,120,000 / $3.60

X = 311,111.11 units

Requirement 3:

Number of Units	Manufacturing Method
Less than or equal to 311,111	Labor Intensive Method
More than 311,111	Capital Intensive Method

Number of Units are rounded off as partial units cannot be manufactured.