Candice Corporation has decided to introduce a new product. The product can be m

Question

Candice Corporation 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: 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 expenses of the new product are $500,000. The variable selling and administrative expenses are $2 per unit regardless of how the new product is manufactured. Calculate the break-even point in units if Candice Corporation uses the: capitalrintensive manufacturing method. labor-intensive manufacturing method. Determine the unit sales volume at which the net operating income is the same for the two manufacturing methods.

Explanation / Answer

Capital Intensive

Breal even to sales in units = Fixed Expense/unit Contribution MArgin

Fixed Expense = Fixed Manufacturing Cost +Fixed selling and Administrative cost

Fixed Expense = 2440000 +500000 =$ 2940000

VAriable Cost = VAriable Manufacturing cost +Variable selling and Administrative Cost

Variable Cost = 14 +2 = 16

Unit Contribution MArgin = selling price - total Variable Cost

Unit Contribution MArgin = 30 - 16 =14

Break evnen units = 2940000/14 = 210000 units

Labour Intensive

Breal even to sales in units = Fixed Expense/unit Contribution MArgin

Fixed Expense = Fixed Manufacturing Cost +Fixed selling and Administrative cost

Fixed Expense = 1320000 +500000 = $1820000

VAriable Cost = VAriable Manufacturing cost +Variable selling and Administrative Cost

Variable Cost = 17.60 +2 = 19.60

Unit Contribution MArgin = selling price - total Variable Cost

Unit Contribution MArgin = 30 - 19.60 = $10.40

Break even sales = 1820000/10.40 = 175000 units

Profit = sales - variable Expeense - FIxed Expense

Capital Intensive

Profit = 30Q - 16Q -2940000 = 14Q - 2940000

Labour Intensive

Profit = 30Q - 19.60Q - 1820000 = 10.40Q -1820000

The Profits are Equal when

14Q - 2940000 = 10.40Q - 1820000

3.6Q = 1120000

Q = 1120000/3.6 = 311111

Unit sales Volume is 311111 units where net operating profit is equal.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.