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BYP18-1 Martinez Company

Price: $3.50

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 Intensive  Labor Itensive
Direct materials   $5.00  $5.50
Direct labor   $6.00  $8.00
Variable overhead   $3.00  $4.50
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.

(a) Calculate the estimated break-even 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 circumstance under which Martinez should employ each of the two manufacturing

1 comment:

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