DECISION MAKING ACROSS THE ORGANIZATION
Martinez Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.
|
Capital-Intensive |
Labor-Intensive |
Direct materials |
$5 per unit |
$5.50 per unit |
Direct labor |
$6 per unit |
$8.00 per unit |
Variable overhead |
$3 per unit |
$4.50 per unit |
Fixed manufacturing costs |
$2,508,000 |
$1,538,000 |
|
|
Martinez’s market research department has recommended an introductory unit sales price of $30. The incremental selling expenses are estimated to be $502,000 annually plus $2 for each unit sold, regardless of manufacturing method.
Instructions
With the class divided into groups, answer the following.
(a) |
Calculate the estimated break-even point in annual unit sales of the new product if Martinez Company uses the:
|
|
1.
|
Capital-intensive manufacturing method. |
2.
|
Labor-intensive manufacturing method. |
|
|
|
(b) |
Determine the annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods.
|
(c) |
Explain the circumstance under which Martinez should employ each of the two manufacturing methods.
(CMA adapted)
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