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Problem 1: Candice Corporation Has Decided To Introduce A New Product. The Product Can Be

The document discusses Candice Corporation's decision to manufacture a new product using either a capital-intensive or labor-intensive method. It provides the fixed and variable costs of each method and calculates the break-even point, degree of operating leverage, and unit sales where net operating income is the same for both methods.

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jenie
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231 views

Problem 1: Candice Corporation Has Decided To Introduce A New Product. The Product Can Be

The document discusses Candice Corporation's decision to manufacture a new product using either a capital-intensive or labor-intensive method. It provides the fixed and variable costs of each method and calculates the break-even point, degree of operating leverage, and unit sales where net operating income is the same for both methods.

Uploaded by

jenie
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Problem 1 : Candice Corporation has decided to introduce a new product.

The product can be


manufactured using either a capital-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:
Capital -intensive Labor -intensive
Variable manufacturing cost per unit P14.00 P17.60
Fixed manufacturing cost per year P2,440,000 P1,320,000
The co's market research department has recommended an introductory selling price of
P30 per unit for the new product. The annual fixed selling and administrative expenses of the
new product are P500,000. The variable selling and administrative expenses are P2 /unit
regardless of how the new product is manufactured.
Required:
1. Calculate the break-even point in units if Candice Corporation uses the:
a. capital-intensive manufacturing method. b. labor-intensive manufacturing method.

Capital Labor
Intensive Intensive
210,000 175,000
Sales P 30 P30.00
VC 16 19.60
CM 14 2,940,000 10,40 1,820,000
FC 2,940,000 1,820,000
NP 0 0

2. Assuming sales of 250,000 units, what is the degree of operating leverage if the company
uses the: a. capital-intensive manufacturing method. 2. labor-intensive manufacturing method.

Capital Labor
Intensive Intensive
250,000 250,000
Sales
VC
CM 14 3,500,000 10.40 2,600,000
FC 2,940,000 1,820,000
NP 560,000 780,000
3. Determine the unit sales volume at which the net operating income is the same for the two
manufacturing methods.
FC + VC = FC + VC
1,820,000 + 19.6 X = 2,940,000 + 16 X
19.6 X - 16 X = 1,120,000
3.6 X = 1,120,000
X = 1,120,000/3.6
X = 311,111.11

The indifference point is 311,112 units where at this level, both Capital intensive and labor
intensive manufacturing methods will have the same profit as shown below:

Capital Labor
Intensive Intensive
311,112 311,112
Sales
VC
CM 14 4,355,555 10.40 3,235,555
FC 2,940,000 1,820,000
NP 1,415,555 1,415,555

At 250,000 units (below the indifference point )

Capital Labor
Intensive Intensive
250,000 250,000
Sales
VC
CM 14 3,500,000 10.40 2,600,000
FC 2,940,000 1,820,000
NP 560,000 780,000

If SV < 311,112 Labor Intensive will give a higher profit

But above the indifference point , say 400,000 units, Capital Intensive will have greater profit

Capital Labor
Intensive Intensive
400,000 400,000
Sales
VC
CM 14 5,600,000 10.40 4,160,000
FC 2,940,000 1,820,000
NP 2,660,000 2,340,000

IF SV > 311,112 Capital Intensive


Multiple Choice .

1. Machine A has fixed costs of P450,000 and a variable cost of P20. Machine B has
fixed costs of P600,000 and a variable cost of P14. What is the indifference point, in
units?
a. 22,500 b. 25,000 c. 42,858 d. none of these

2. Osceola Company earned P50,000 on sales of P400,000. It earned P70,000 on sales


of P450,000. Total fixed costs are a. P 0 b. P 50,000 c. P110,000 d. P180,000

Sales 450,000 400,000 50,000


VC 60 % 270,000 240,000 30,000
CM 40 % 180,000 160,000 20,000
FC 110,000 110,000 0
NP 70,000 50,000 20,000

3. Andrew is interested in entering the catfish farming business. He estimates if he


enters this business, his fixed costs would be P50,000 per year and his variable costs
would equal 30 percent of sales. If each catfish sells for P2, how many catfish would
Andrew need to sell to generate a profit that is equal to 10 percent of sales?
a. 40,000 b. 41,667 c. 35,000

d. No level of sales can generate a 10 percent net return on sales.

41,667

Sales P2 100 % P 83,333


VC 30 % 25,000
CM 70 % 58,333
FC 60 % 50,000
NP 10% 8,333
\

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