Toledo Tool Company plans to introduce a new product. The company also considers adopting a new computer-assisted

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Toledo Tool Company plans to introduce a new product. The company also considers adopting a new computer-assisted manufacturing system. The new product can be manufactured by either the new computer-assisted system or its traditional labor-intensive production system. The company can achieve the same quality of the product regardless of which the production system employed.

The estimated product costs by the two production systems are as follows:

	Traditional Labor-Intensive Production Systems	New Computer-Assisted Manufacturing Systems
Direct Material (per unit)	$10.5	$8.4
Direct Labor (per unit)	$14.0	$9.0
Variable overhead (per unit)	$5.5	$3.4
Fixed overhead	$2M	$3.5M

The marketing department recommends that the unit selling price of the new product be at $65, and the company expects the selling expenses for the new product to be $830,000 annually plus $4 for each unit sold. The company is currently subject to a 40% income tax rate.

A) Calculate the minimum number of units of the new product required for the company to break even if the company uses the (a) labor-intensive production system; (b) computer-assisted manufacturing system. (Round each answer to the nearest whole number.)

B) To achieve an after-tax income of 550,000, how many units of the new product will the company have to sell if the company uses the (a) labor-intensive production system; (b) computer-assisted manufacturing system? (Round each answer to the nearest whole number.)

C) Briefly discuss the circumstances under which the company should employ each of the labor-intensive production system and the computer-assisted production systems.

D) As a production manager, you must decide which production system should be used. One factor you should consider is operating leverage. How is the operating leverage concept related to your decision?

E) Briefly discuss the likely profitably impact of an economic recession for highly automated manufacturers. What can you say about the risk associated with these firms?