Question

Candace Corporation has decided to introduce a new product that can be manufactured using
either a capital-intensive method or a labour-intensive method.

The predicted manufacturing costs for each method are as follows:

Capital-Intensive Labour-Intensive
Direct materials per unit
Direct labour per unit
Variable manufacturing overhead per unit
Fixed manufacturing overhead per year
$5.00
$6.00
$3.00
$2,440,000
$5.60
$7.20
$4.80
$1,320,000

Candace’s market research department has recommended an introductory unit sales price of $30.
The incremental selling costs are predicted to be $500,000 per year plus $2 per unit sold.

Required:

1. Calculate the annual break-even point in units if Candace used the:
a. Capital-intensive manufacturing method
b. Labour-intensive manufacturing method

2. Determine the annual unit volume at which Candace would be indifferent between the
two manufacturing methods. (HINT: Candace would be indifferent between the two
methods at unit volume X where costs are equal. You need to solve for X.)

Answer 1

1. Capital : 183750 Labor: 146774