The Chopin Company has decided to introduce a new product. The new product can be manufactured by either a computer-assisted manufacturing (CAM) or a labor-intensive production (LIP) system. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs for each of the two methods are as follows. CAM System: Direct Material = $5.0 Direct Labor (DLH) = 0.5 DLH X $12 = $6 Variable Overhead = 0.5DLHx$6 = $3 Fixed Iverhead* = $ 2,440,000 LIP System: Direct Material = $5.6 Direct Labor (DLH) = 0.8 DLH X $9 = $7.2 Variable Overhead = 0.8 DLH X $6 = $4.8 Fixed Overhead* = $1,320,000
The Chopin Company has decided to introduce a new product. The new product can be manufactured by either a computer-assisted manufacturing (CAM) or a labor-intensive production (LIP) system. The manufacturing method will not affect the quality of the product. The estimated
CAM System:
Direct Material = $5.0
Direct Labor (DLH) = 0.5 DLH X $12 = $6
Variable Overhead = 0.5DLHx$6 = $3
Fixed Iverhead* = $ 2,440,000
LIP System:
Direct Material = $5.6
Direct Labor (DLH) = 0.8 DLH X $9 = $7.2
Variable Overhead = 0.8 DLH X $6 = $4.8
Fixed Overhead* = $1,320,000
*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
Required:
- Calculate the estimated break-even point in annual unit sales of the new product if the company uses the :(a) computer-assisted manufacturing systems; (b) labor-intensive production system.
- Determine the annual unit sales volume at which the firm would be indifferent between the two manufacturing methods.
- Management must decide which manufacturing method to employ. One factor is should consider is operating leverage. Explain the concept of operating leverage. How is this concept related to Mozaic’s decision?
- Describe the circumstances under which the firm should employ each of the two manufacturing methods.
- Identify some business factors other than operating leverage that management should consider before selecting the manufacturing methods.
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