Unit 10: CVP Analysis

I > Essay

Answer:

Capital Intensive Manufacturing method

When BEP: Total Revenue = Total cost

30Q = 14Q + 500 000 +2Q + 2 440 000 => Q = 210 000 units

Labor – intensive manufacturing method

Total Revenue = Total cost

30Q = 17.6Q + 500 000 + 2Q + 1 320 0000 => Q = 175 000 units

When Candice Company would be indifferent bw the 2 manufacturing methods:

14Q – 2 940 000 = 10.4Q – 1 820 000 => Q = 311 111 (units)

For method capital intensive:

BEP = 210 000 = 2 940 000/ CM => CM = 14

0.5 Direct labor bour contribute CM 14

1 Direct labor hour contribute CM 28

For labor – intensive

BEP = 175 000 = 1 320 000/ CM => CM = 7.54

0.8 Direct labor contribute CM 7.54

1 Direct labor contribute CM 9.4

Candice should employ the capital - intensive method if annual sales are expected to exceed 311, 111 (units)

The labor - intensive method if annual sale are not expected to exceed 311, 111 (units)

Business factor that Candice must consider before selecting the capital – intensive/ labor intensive manufacturing
method are:

- The ability of produce and market quickly

- Variability or uncertainty with respect to demand
- The discontinued product while incurring at least amount loss