Managerial Accounting case study 2."

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QUESTION 2


Play For Fun Berhad has decided to introduce a new product. The product can be

manufactured using either a machine-intensive or labor-intensive method. The

manufacturing method will not affect the quality or sales of the product. The estimated

manufacturing costs of the two methods are as follows:


Machine



Labor



-intensive



-intensive



Variable manufacturing cost per unit....................



$14.00



$17.60



Fixed manufacturing cost per year.........................



$2,440,000



$1,320,000



The company's market research department has recommended an introductory selling

price of $30 per unit for the new product. The annual fixed selling and administrative

expenses of the new product are $500,000. The variable selling and administrative

expenses are $2 per unit regardless of how the new product is manufactured.



Required:

a)



Calculate the break-even point in units if Play For Fun Berhad uses the:

i. machine-intensive manufacturing method.

ii. labor-intensive manufacturing method.



b)



Determine the unit sales volume at which the net operating income is the same for the

two manufacturing methods.



c)



Assuming sales of 250,000 units, what is the degree of operating leverage if the

company uses the:

i. machine-intensive manufacturing method.

ii. labor-intensive manufacturing method.



d) What is your recommendation to management concerning which manufacturing

method should be used?

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