Question

Wildhorse Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows. Capital-Intensive Labor-Intensive Direct materials $5 per unit $5.50 per unit Direct labor $6 per unit $8.00 per unit Variable overhead per unit $4.50 per unit Fixed manufacturing costs $2,278,000 $1,410,000 $3 Wildhorse' market research department has recommended an introductory unit sales price of $31. The incremental selling expenses are estimated to be $482,000 annually plus $2 for each unit sold, regardless of manufacturing method. With the class divided into groups, answer the following. Calculate the estimated break-even point in annual unit sales of the new product if Wildhorse Company uses the: 1. Capital-intensive manufacturing method. 2. Labor-intensive manufacturing method. Capital-Intensive Labor-Intensive Break-even point in units

Answer 1

Capital intensive manufacturing method
breakeven point = fixed cost/contribution margin p.u
contribution margin
sale price	31
less: variable cost	16
(5+6+3+2)
contribution margin	15
Fixed cost = (2278000+482000) = 2760000
Breakeven point = 2760000/15 = 184000
labor intensive manufacturing method
fixed cost = (1410000+482000) = 1892000
contribution margin = 31-(5.50+8+4.50+2) = 11
Breakeven point = 1892000/11 = 172000 units
2) assume volume units sold = x
profit= contribution margin-fixed cost
capital intensive manufacturing method= 15x-2760000
labor intensive manufacturing method = 11x-1892000
15x-2760000 = 11x-1892000
4x = 868000
x = 217000 Units