DECISION MAKING ACROSS THE ORGANIZATION BYP 18-1 Martinez Company has decided to
ID: 2379504 • Letter: D
Question
DECISION MAKING ACROSS THE ORGANIZATION
BYP 18-1 Martinez Company has decided to introduce a new product. The new product can be manufactured in 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
Intensive
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
Capital
Labor
Intensive
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
Explanation / Answer
a)
(1) Capital-intensive manufacturing method
Variable cost per unit = 5+6+3+2 = 16
estimated breakeven point in annual unit sales = fixed cost/(price -variable cost) = (2,508,000+502,000 )/(30-16) =215000 units
(2) Labor-intensive manufacturing method
Variable cost per unit = 5.5+8+4.5+2 = 20
estimated breakeven point in annual unit sales = fixed cost/(price -variable cost) = (1,538,000+502,000 )/(30-20) =204000 units
b)Let the annual sales volume b x
The profit shoul,be same under both methods
Profit = Sales-Variable cost - Fixed cost
x*(30-16) - (2,508,000+502,000 ) = x*(30-20) - (1,538,000+502,000 )
x = 242,500 units
c)Depends on the demand.
If the demand is low, then Labor-intensive manufacturing method
If demand is high then Capital-intensive manufacturing method
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