Question

Alpha Inc. operates in a highly competitive environment where new product launches are vital to ensure the sustainability of its business. The company is in the midst of deciding whether to adopt a labour-intensive or a more capital-intensive manufacturing system for its latest new product. There will be no discernible difference in quality between the two manufacturing methods. The management accountant has extracted the following estimates relating to the two methods:

Labour-intensive $16.80 Direct material per unit Capital-intensive $15.00 Direct labour per unit 0.8 DLH+ @ $27.00 0.5 DLH @ $36.00 Variable overhead per unit 0.8 DLH @ $18.00 0.5 DLH @ $18.00 Fixed overhead* $3,960,000 $7,320,000

+: DLH refers to Direct Labour Hours

*: These costs are directly attributable to the new product line. They are avoidable if production does not commence.

Based on a marketing research conducted by the company, consumers are likely to be acceptable to a unit price of $90. Selling expenses are estimated to be $1,500,000 annually for the fixed component and $6 for each unit for the variable component.

Sketch graphs (without detailed plotting) to help to explain the cost behaviours of the two (2) methods and comment on which method is better for the company. You may consider the point at which the company is indifferent between the two (2) methods. Justify your comment(s).

Answer 1

Alphaine. ( 9 catailation of contribution margin Labour Intensive Capital Intensive (LI) (CI) $90 $90 selling Price (SP) variable cost (v.) $61.8) $28.2 $21 Contribution margin (CM) $3,960,000 $ 7,320000 Fided cost (FC) (Selling expenses are ignored as its saime for both the methods / eystems .) We know Indifference point can be calculated using the formula! & FC - FC2 VC - VC,

$3,960,000 - $7,320,000 $21 - $2812 - $3,360,000 - $7.2 466, 666 units is the Indifference Point where the Alpha Inc is indifferent in selecting any of the method JD If the producto demand for the product in more than 466, 666 units. thes use capital intesive method as the contribution margin per direct labout hour is greater. (DLH) understanding! - (Convert to 1 DLH) Contribution margin. $ 28:2 (.8DLH) $21 (15 DHL) By converting to 10H $35.25 $42

if the demand for the product is less than 466, 666 units use Labour intensive moschod because the fixed cost component is Les & Graphs LI A of wate 466, 666 unts produed wait stay Unuts 466,666Uqt unit Produced.