Broadening Your Perspective

BYP18-1

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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