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CVP Analysis

CP has decided to introduce a new product which can be manufactured by either a computer assisted manufacturing system or a labor intensive production system. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are:
Computer assisted Labor intensive
Direct material......................................\$5.00...............................................\$5.60
Direct labor(DLH denotes direct
labor hours).................................0.5DLH@\$12...6.00............0.8DLH@\$9......7.20

The company's marketing research dept has recommended an introductory unit sales price of \$30. Selling expenses are estimated to be \$500,000 annually plus \$2 for each unit sold.
1.Calculate the estimated break even point in annual unit sales of the new product if the company uses a. computer assisted manufacturing system or b. labor intensive production system.
2.Determine the annual unit sales volume at which the firm would be indifferent between the tow manufacturing methods.

Solution Preview

1. Calculate the estimated break even point in annual unit sales of the new product if the company uses

a. computer assisted manufacturing system or
Variable Cost per unit, V1=Direct material+ Direct labor+ Variable overhead+ variable selling expanses
=5+6+3+2=\$16

Fixed Cost=F1=Fixed overheads+ annual selling ...

Solution Summary

Solution describes the steps to calculate break even point in the given cases. It also calculates the volume at which firm would be indifferent to both production methods.

\$2.19