FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Accounting

Evman Company has decided to introduce a new product, which can be manufactured by either a computer-assisted manufacturing system or a labour-intensive production system. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows:

 

 

 

computer-assisted manufacturing system

 

 

labour-intensive

production system

 

Direct Material

 

 

$5.00

 

$5.60

 

Direct Labour

 

 

.5DLH @ $12            $6.00

 

.8 DLH @ $9           $7.20

 

Variable Overhead

 

.5 DLH @ $6             $3.00

 

.8 DLH @ $6           $4.80

 

 

Fixed Overhead *

 

 

$2,440,000

 

$1,320,000

 

 

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 sales price of $30. Selling expenses are estimated to be $500,000 annually plus $2 for each unit sold. (Ignore income taxes)

REQUIRED

Prepare a profit-volume graph for these two methods, and then comment at which levels of activity the one production method would be preferred over the other.      

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