Martinez Company

This will address the questions illustrated in exercise 18-1 “Decision Making Across The Organization”. In this exercise, the Martinez Company will launch new merchandise into the market and the process will be either the capital-intensive method or a labor-intensive method.
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.
Unit sales price = $30 Direct materials cost/unit = $5
Direct labor cost/unit = $6 Variable overhead cost/unit = $3
Selling expense/unit = $2 Total variable cost/unit = 5+6+3+2 = $16
Contribution/unit = $30 - $16 = $14
Fixed manufacturing costs = $2,508,000
Fixed selling costs = $502,000
Total fixed costs = $3,010,000
Labor-intensive manufacturing method.
Unit sales price = $30 Direct materials cost/unit = $5.50
Direct labor cost/unit = $8 Variable overhead cost/unit = $4.50
Selling expense/unit = $2
Total variable cost/unit = 5.50+8+4.50+2 = $20
Contribution/unit = $30 - $20 = $10
Fixed manufacturing costs = $1,538,000
Fixed selling costs = $502,000
Total fixed costs = $2,040,000
Break-even sales in units = Total fixed costs / contribution per unit =
$2,040,000 / $20 = $204,000
Break-even point in sales = $204,000 * $30 = $6,120,000
b. Determine the annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods.
Capital-Intensive manufacturing method:
Contribution/unit in capital intensive method = $14
Total contribution at annual sales of x units = $14*x
Total fixed costs under capital intensive method = $3,010,000
Profit under capital intensive method = 14x - $3,010,000
Labor-Intensive manufacturing