Gagliano Company 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.
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Gagliano’s market research department has recommended an introductory unit sales price of $30. The incremental selling expenses are estimated to be $502,000 annually plus $2 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 Gagliano Company uses the:
(1) capital intensive manufacturing method.
(2) labor intensive manufacturing method.
(b) Determine the annual unit sales volume at which Gagliano Company would be indifferent between the two manufacturing methods.
(c) Explain the circumstance under which Gagliano should employ each of the two manufacturingmethods.
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