Creative Ideas has decided to introduce a new product. The new product can be manufactured by either a capital intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.

Creative Ideas’ market research department has recommended an introductory unit sales price of Rs2,240. The incremental selling expenses are estimated to be Rs35,140,000 annually plus Rs140 for each unit sold, regardless of manufacturing method.

Instructions

With the class divided into groups, answer the following.

a. Calculate the estimated break-even point in annual unit sales of the new product if Creative Ideas uses the:

1. Capital-intensive manufacturing method.

2. Labor-intensive manufacturing method.

b. Determine the annual unit sales volume at which Creative Ideas would be indifferent between the two manufacturing methods.

c. Explain the circumstance under which Creative Ideas should employ each of the two manufacturing methods.

Transcribed Image Text:

Capital- Intensive Labor- Intensive Rs385 per unit Rs560 per unit Rs315 per unit Rs108,500,000 Direct materials Rs350 per unit Rs420 per unit Rs210 per unit Rs176,680,000 Direct labor Variable overhead Fixed manufacturing costs