Decision Making

Topics: Capital intensity, Labor intensity, Decision making Pages: 3 (496 words) Published: March 17, 2014


Decision making across the organization

Introduction
Capital Intensive: A business process or an industry that requires large amounts of money and other financial resources to produce a good or service. A business is considered capital intensive based on the ratio of the capital required to the amount of labor that is required. (investopedia) Labor Intensive: A process or industry that requires a large amount of labor to produce its goods or services. The degree of labor intensity is typically measured in proportion to the amount of capital required to produce the goods/services; the higher the proportion of labor costs required, the more labor intensive the business.(investopedia)

DECISION MAKING ACROSS THE ORGANIZATION
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- Labor-

IntensiveIntensive
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:

Capital-intensive manufacturing method
Let CM = contribution margin

1 Contribution margin per unit = sale price - (direct material + direct labor + variable overhead) = $30 - ( $5 + $6 + $3)
=...
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