How did you know to add the Incremental selling expenses to the fixed manufactur
ID: 2503829 • Letter: H
Question
How did you know to add the Incremental selling expenses to the fixed manufacturing costs? And to include the $2 per unit for the variable costs?
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
Martinezs marketing 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:
(a) Calculate the estimated breakeven point in annual unit sales of the new product if Martinez Company uses the
(1) Capital-intensive manufacturing method
(2) Labor-intensive manufacturing method
(b) Determine the annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods.
(c) Explain the circumstances under which Martinez should employ each of the two manufacturing methods.
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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