Broadening Your perspective

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.

(a) Calculate the estimated break-even point in annual unit sales of the new product if Martinez Company uses the: Is price in number of units, the number of units should equal the variable cost per unit plus the total fixed cost plus profit (Kimmel, Weygand, & Kieso, 2011, Ch 18.).

1. Capital-intensive manufacturing method. The break-even point for a capital intensive method would 92,888. 2. Labor-intensive manufacturing method. The break-even point for the labor intensive method would be achieved at 62,775 (b) Determine the annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods. The Annual unit sales volume at which Martinez Company would be indifferent between the capital-intensive manufacturing method and the labor-intensive manufacturing method is $970.000.

(c) Explain the circumstance under which Martinez should employ each of the two manufacturing methods. (CMA adapted) If the Martinez Company would have the lowest manufacturing cost as well as the lowest variable cost, fixed cost and direct labor cost than implementing the Capital-intensive manufacturing method. This method will also provide the highest cost saving and highest potential cost savings. The labor-intensive methods do not readily adopt to change in the company’s production. Capital-intensive method can however, easily be adjusted to suit modern trends in production due to their flexibility. (Kimmel, Weygandt, & Kieso, 2011, Ch 18.).

References

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business decision making (4th ed.). NJ: John Wiley & Sons.