Week 5 Decision Making Across the Organization

Topics: Variable cost, Contribution margin, Cost Pages: 2 (605 words) Published: January 14, 2014


Decision Making Across the Organization
ACC561

Decision Making Across the Organization
The Martinez Company has decided to introduce a new product and would like to evaluate the costs of manufacturing through capital intensive and labor intensive manufacturing methods to determine which of the two methods to employ. The values to be used in the evaluation for capital intensive manufacturing are direct materials at $5 per unit, direct labor at $6 per unit, a variable overhead of $3 per unit, and fixed manufacturing costs of $2,508,000. The values for material, labor, and overhead are summed to find the total variable cost of $14. The labor intensive values are direct materials at $5.50 per unit, direct labor at $8 per unit, a variable overhead of $4.50 per unit, and fixed manufacturing costs of $1,538,000. The research department of Martinez recommended an introductory price unit sales price of $30. Incremental selling expenses are estimated to be $502,000 annually plus $2 for each unit sold regardless of the method used to manufacture. Capital Intensive

To calculate capital intensive estimated break-even point in annual unit sales of the new product the contribution margin per unit and contribution margin per ratio are necessary. The equation for contribution margin per unit is Selling Price + Variable Cost, or $30 + $14, for a contribution margin per unit price of $16. The equation for contribution margin ration is Contribution Margin per Unit / Selling Price, or $16/$30, for a contribution margin ratio of 53%. The break-even point in units is calculated by dividing the fixed costs by the contribution margin per unit value, $2,508,000 / $16 = 156750 units as the break-even point. The fixed costs divided by the contribution margin ratio, $2,508,000 / 53% = $4,702,500 break-even point in dollars. Labor Intensive

To calculate capital intensive estimated break-even point in annual unit sales of the new product the contribution margin per unit...
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