Question

Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive)

Short answer

Under labor intensive manufacturing facility, fixed cost is lower than the capital intensive facility. Hence, the break even point is lower in case of labor intensive and high in case of capital intensive. The operating leverage under labor intensive are not highly affected when the sales volume of the company increases. But, in case of capital intensive facility, operating leverage increases with the increase in sales volume of the company.

Step-by-step solution

Step-by-Step Solution:Step 1: Labor intensive

Labor intensive organizations requires the large number of labors to produce the goods and services of the organization. Under this techinique, fixed cost relating to the machineries, electricity, maintenance, etc. get reduced.

Capital intensive

Capital intensive companies require large amount of investment in material, equipments etc. Under this techinique, fixed cost is increased due to which the capital intensive companies have high break even point as well as the high operating leverage in comparison to labor intensive facility.