Celestial Products, Inc. has decided to introduce a new product, which can be ma

Question

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:

*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 $81.00. Selling expenses are estimated to be $930,000 annually plus $4.80 for each unit sold. (Ignore income taxes.)

Problem 7-44 Part 1

Required:

Calculate the estimated break-even point in annual unit sales of the new product if the company uses the (a) computer-assisted manufacturing system; (b) labor-intensive production system. (Do not round intermediate calculations. Round your final answers to the nearest whole number.)

Determine the annual unit sales volume at which the firm would be indifferent between the two manufacturing methods. (Do not round intermediate calculations. Round your final answer to the nearest whole number.)

Computer-Assisted
Manufacturing System Labor-Intensive
Production System Direct material $ 9.30 $ 10.20 Direct labor (DLH denotes direct-labor hours) 0.5DLH @ $27.00 13.50 0.8DLH @ $22.50 18.00 Variable overhead 0.5DLH @ $18.00 9.00 0.8DLH @ $18.00 14.40 Fixed overhead* $ 4,560,000 $ 2,880,000

Explanation / Answer

Calculation of Break Even Points: Computer Labor Sales Price 81.00 81.00 Less: Variable Costs Direct Material 9.30 10.20 Direct Labor 13.50 18.00 Variable OH 9.00 14.40 Selling Expense 4.80 4.80 Contribution Margin 44.40 33.60 Fixed Costs: Overhead 4560000 2880000 Selling Expense 930000 930000 Total 5490000 3810000 Break Even Point in Units 123649 113393 Assume Indifference Point Quanity is Q: Computer Labor Contribution Margin 44.40 33.60 Total Fixed Costs 5490000 3810000 Profit(Computer Asisted)= 44.40Q-5490000 Profit(Labor Asisted)= 33.60Q-3810000 44.40Q-5490000=33.60Q-3810000 44.40Q-33.60Q=5490000-3810000 44.40Q-33.60Q=5490000-3810000 10.80Q=1680000 Q=1680000/10.80 Q= 155556

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