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Assume Paper Mate company is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor

Assume Paper Mate company is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor-intensive method The estimated manufacturing costs for each method are as follows:

 

Direct material per unit $5 $8

Direct labor per unit $5 $12

Variable manufacturing overhead per unit $4 $2

Fixed manufacturing overhead per unit $2,440,00000 $700,00000

Paper Mate’s market research department has recommended an introductory unit sales price of $40 The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold

 

Required

a Determine the annual break-even point in units if Paper Mate uses the:

i Capital-intensive manufacturing method

ii Labor-intensive manufacturing method

b Determine the annual unit volume at which paper Mate is indifferent between the two manufacturing methods

c Management wants to know more about the effect of each alternative on operating leverage

i Compute operating leverage for each alterative at a volume of 250,000 units

ii Which alternative has the highest operating leverage? Why?

Mar 24 2020 View more View Less

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