Week 5 Broadening your perspective 18 1
Week 5 Broadening Your Perspective 18-1
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.
(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 be 92,888. (30 = 3 + 2,508,000) (30 = 2,508,003 / 30 – 3 = 92,888) Formula:
(S = VC + FC) which equals to: (X = FC / P-V)
2. Labor-intensive manufacturing method. The break-even point for the labor intensive
method would be achieved at 62,775. (30 = 5.50 +1,538,000) (30 = 1,538,005.5 / 30 – 5.50 =
62,775) Formula: (S = VC + FC) which equals to: (X = FC / P-V)
(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.
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 be 92,888. (30 = 3 + 2,508,000) (30 = 2,508,003 / 30 – 3 = 92,888) Formula:
(S = VC + FC) which equals to: (X = FC / P-V)
2. Labor-intensive manufacturing method. The break-even point for the labor intensive
method would be achieved at 62,775. (30 = 5.50 +1,538,000) (30 = 1,538,005.5 / 30 – 5.50 =
62,775) Formula: (S = VC + FC) which equals to: (X = FC / P-V)
(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.
References: Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business decision making (4th ed.). NJ: John Wiley & Sons.