Martinez Company

BYP18-1             

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.