Answered: The Chopin Company has decided to…

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter6: Statistical Inference

Section: Chapter Questions

Problem 26P: Because of high production-changeover time and costs, a director of manufacturing must convince...

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Question

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

*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 $30. Selling expenses are estimated to be $500,000 annually plus $2 for each unit sold. (Ignore income taxes.)

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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