LT Team B Week5 Part A And B

Topics: Variable cost, Costs, Price Pages: 3 (335 words) Published: April 17, 2015

Team B


BYP 18-1 The 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

Martinez 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.

Question: A. Calculate the estimated break-even point in annual unit sales of the new product if Martinez Company uses the: 1. Capital-intensive method.
Total Fixed Cost = 250,8000 + 502,000 = 301,0000
Contribution Margin Per Unit = Selling Price –Variable Costs = 30 -5 - 6 - 3 - 2 = $14
Breakeven Point in Unit Sales = 3,010,000 / 14 = 215,000 Units 2. Labor-intensive method.
Total Fixed Cost = 1,538,000 + 502,000 = 2,040,000
Contribution Margin Per Unit = Selling Price –Variable Costs = 30 -5.5 - 8 - 4.5 - 2 = $10
Breakeven Point in Unit Sales = 2,040,000 / 10 = 204,000 Units

Question: B. Determine annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods.

3. To determine the point where the same number of units produced using both method yield the same revenue we start by first finding the contribution margins for each method by subtracting the variable price per unit from the selling price:

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