Gagliano Question

Gagliano is introducing a new product using either a capital-intensive method or a labor-intensive method, which will not affect the quality of the product. Estimated manufacturing costs as follows: Capital-Intensive-Direct Materials $5/unit, Direct Labor $6/unit, Variable Overhead $3/unit, Fixed Manufacturing Costs $2,508,000. Labor-Intensive-Direct Materials $5.50/unit, Direct Labor $8.00/unit, Variable Overhead $4.50/unit, Manufacturing Costs $1,538,000. Introductory unit sales price of $30. Incremental selling expenses are estimated to be $502,000 annually plus $2/unit sold, regardless of manufacturing method. Instructions:

(a) Calculate the estimated break-even point in annual unit sales of the new product if Gagliano Company uses the: (1) capital-intensive method (2) labor-intensive method.

(b) Determine annual unit sales volume at which they would be indifferent between the two methods.

(c) Explain when both should be employed.