Candace Corporation has decided to introduce a new product that can be manufactured using
either a capital-intensive method or a labour-intensive method.
The predicted manufacturing costs for each method are as follows:
Capital-Intensive Labour-Intensive
Direct materials per unit
Direct labour per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year
$5.00
$6.00
$3.00
$2,440,000
$5.60
$7.20
$4.80
$1,320,000
Candace’s market research department has recommended an introductory unit sales price of $30.
The incremental selling costs are predicted to be $500,000 per year plus $2 per unit sold.
Required:
1. Calculate the annual break-even point in units if Candace used the:
a. Capital-intensive manufacturing method
b. Labour-intensive manufacturing method
2. Determine the annual unit volume at which Candace would be indifferent between the
two manufacturing methods. (HINT: Candace would be indifferent between the two
methods at unit volume X where costs are equal. You need to solve for X.)
1. Capital : 183750 Labor: 146774
To calculate the annual break-even point in units for each manufacturing method, we need to determine the number of units that need to be sold in order to cover all the costs (both fixed and variable costs) and reach a zero-profit point.
Let's start with the capital-intensive manufacturing method (method A).
To calculate the break-even point in units for the capital-intensive method, we need to consider the following costs:
- Direct materials per unit: $5.00
- Direct labor per unit: $6.00
- Variable manufacturing overhead per unit: $3.00
- Fixed manufacturing overhead per year: $2,440,000
- Selling costs per unit: $2.00
The total cost per unit for the capital-intensive method is calculated as follows:
Total cost per unit = Direct materials per unit + Direct labor per unit + Variable manufacturing overhead per unit + (Fixed manufacturing overhead per year / Number of units produced in a year) + Selling costs per unit
Let's denote the number of units produced in a year as X.
The equation to calculate the break-even point in units for the capital-intensive method is:
Revenue = Total cost per unit * X
We know the introductory unit sales price is $30, and the incremental selling costs are predicted to be $500,000 per year plus $2 per unit sold.
So, the revenue equation becomes:
$30 * X = (Total cost per unit * X) + ($500,000 + $2 * X)
Now, let's solve this equation to find the break-even point in units for the capital-intensive method.
Similarly, we can repeat the above steps for the labor-intensive manufacturing method (method B).
To calculate the break-even point for the labor-intensive method, the costs to consider are:
- Direct materials per unit: $5.60
- Direct labor per unit: $7.20
- Variable manufacturing overhead per unit: $4.80
- Fixed manufacturing overhead per year: $1,320,000
- Selling costs per unit: $2.00
The equation to calculate the break-even point in units for the labor-intensive method is:
$30 * X = (Total cost per unit * X) + ($500,000 + $2 * X)
Now, let's solve this equation to find the break-even point in units for the labor-intensive method.
To determine the annual unit volume at which Candace would be indifferent between the two manufacturing methods, we need to find the point where the costs for both methods are equal.
We need to solve for X in the following equation:
(Capital-intensive method cost per unit * X) + ($500,000 + $2 * X) = (Labor-intensive method cost per unit * X) + ($500,000 + $2 * X)
This will give us the annual unit volume at which Candace would be indifferent between the two manufacturing methods.