Gagliano is introducing a new product using either a capital-intensive method or a labor-intensive method, which will not affect the quality of the product. Estimated manufacturing costs as follows:
Capital-Intensive
Direct Materials $5/unit
Direct Labor $6/unit
Variable Overhead $3/unit
Fixed Manufacturing Costs $2,508,000.
Labor-Intensive
Direct Materials $5.50/unit
Direct Labor $8.00/unit
Variable Overhead $4.50/unit
Manufacturing Costs $1,538,000
Introductory unit sales price of $30. Incremental selling expenses are estimated to be $502,000 annually plus $2/unit sold, regardless of manufacturing method.
Instructions:
(a) Calculate the estimated break-even point in annual unit sales of the new product if Gagliano Company uses the: (1) capital-intensive method (2) labor-intensive method.
(b) Determine annual unit sales volume at which they would be indifferent between the two methods.
(c) Explain when both should be employed.