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:

	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

*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.)

Answer 1

	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