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Alternative Production Procedures and Operating Leverage Assume Paper Mate is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor-intensive method. The predicted manufacturing costs for each method are as follows: Capital Intensive Labor Intensive Direct materials per unit $ 5.00 $ 8.00 Direct labor per unit $ 5.00 $ 12.00 Variable manufacturing overhead per unit $ 4.00 $ 2.00 Fixed manufacturing overhead per year $ 2,440,000 $ 700,000 Paper Mate's market research department has recommended an introductory unit sales price of $40. The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold. (a) Determine the annual break-even point in units if Paper Mate uses the: 1. Capital-intensive manufacturing method. Answer units 2. Labor-intensive manufacturing method. Answer units (b) Determine the annual unit volume at which Paper Mate is indifferent between the two manufacturing methods. Answer units (c) Management wants to know more about the effect of each alternative on operating leverage. 1. Explain operating leverage and the relationship between operating leverage and the volatility of earnings. They have little or no correlation because they are unrelated. They are positively correlated, with increases in operating leverage accompanied by increases in the volatility of earnings. They are negatively correlated, with increases in operating leverage accompanied by decreases in the volatility of earnings. 2. Compute operating leverage for each alternative at a volume of 250,000 units. Round your answers two decimal places. Capital-Intensive operating leverage Answer Labor-Intensive operating leverage Answer 3. Which alternative has the higher operating leverage? Why? The labor intensive method has a higher operating leverage because of higher variable conversion costs. The labor intensive method has a higher operating leverage because of lower variable manufacturing overhead. The capital intensive method has a higher operating leverage because of the greater use of fixed assets. The capital intensive method has a higher operating leverage because of the higher variable manufacturing overhead.
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Calculate the amount of income tax that Rummy must pay each year if (a) the asset is not pur- chased and (b) the asset is purchased.
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Ended French and Indian War Terms: Britain gained all of French Canada & all territory south of Canada & east of the Mississippi River.
Financial statements for Askew Industries for 2013 are shown below:
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Dr. Tooth is a 40-year old dentist in Small Town, USA. He graduated from dental school seven years ago and built a thriving practice. In 2001, however, Dr. Tooth had an ugly billing disagreement with a patient. As a result of the stress of losing his..
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Determine the amount at which Beech should report its inventory on the December 31, Year 1, balance sheet under (1) IFRS and (2) U.S. GAAP.
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