Mozaic Inc. has decided to introduce a new product, which can be manufactured by either a computer-assisted manufacturing system (CAM) or a labor-intensive production system (LIP). The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows: CAM System LIP System Direct Material Direct Labor (DLH) $5.00 $5.60 0.5 DLH x $12 $6.00 0.8 DLH x $9 $7.20 Variable Overhead $3.00 0.8 DLH x $6 $1,320,000 0.5 DLH x $6 $4.80 Fixed Overhead* $2,440,000 * These costs are directly traceable to the new product line. They would not be incurred if the new product were not produced. The company's marketing research department has recommended an introductory unit sales price of $30. Selling expenses are estimated to be $500,000 annually plus $2 for each unit sold. (Ignore income taxes.) Required: 1. Describe the circumstances under which the firm should employ each of the two manufacturing methods. 2. Identify some business factors other than operating leverage that management should consider before selecting the manufacturing method.

Mozaic Inc. has decided to introduce a new product, which can be manufactured by either a computer-assisted manufacturing system (CAM) or a labor-intensive production system (LIP). The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows: CAM System LIP System Direct Material Direct Labor (DLH) $5.00 $5.60 0.5 DLH x $12 $6.00 0.8 DLH x $9 $7.20 Variable Overhead $3.00 0.8 DLH x $6 $1,320,000 0.5 DLH x $6 $4.80 Fixed Overhead* $2,440,000 * These costs are directly traceable to the new product line. They would not be incurred if the new product were not produced. The company's marketing research department has recommended an introductory unit sales price of $30. Selling expenses are estimated to be $500,000 annually plus $2 for each unit sold. (Ignore income taxes.) Required: 1. Describe the circumstances under which the firm should employ each of the two manufacturing methods. 2. Identify some business factors other than operating leverage that management should consider before selecting the manufacturing method.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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