Martinez Company

This will address the questions illustrated in exercise 18-1 “Decision Making Across The Organization”. In this exercise, the Martinez Company will launch new merchandise into the market and the process will be either the capital-intensive method or a labor-intensive 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.
Unit sales price = $30 Direct materials cost/unit = $5
Direct labor cost/unit = $6 Variable overhead cost/unit = $3
Selling expense/unit = $2 Total variable cost/unit = 5+6+3+2 = $16
Contribution/unit = $30 - $16 = $14
Fixed manufacturing costs = $2,508,000
Fixed selling costs = $502,000
Total fixed costs = $3,010,000
Break-even sales in units = Total fixed costs / contribution per unit = $
$3,010,000 / $14 = $215,000
Break-even point in sales = $215,000 * 30 = $6,450,000
2.
Labor-intensive manufacturing method.
Unit sales price = $30 Direct materials cost/unit = $5.50
Direct labor cost/unit = $8 Variable overhead cost/unit = $4.50
Selling expense/unit = $2
Total variable cost/unit = 5.50+8+4.50+2 = $20
Contribution/unit = $30 - $20 = $10
Fixed manufacturing costs = $1,538,000
Fixed selling costs = $502,000
Total fixed costs = $2,040,000
Break-even sales in units = Total fixed costs / contribution per unit =
$2,040,000 / $20 = $204,000
Break-even point in sales = $204,000 * $30 = $6,120,000
b. Determine the annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods.
Capital-Intensive manufacturing method:
Contribution/unit in capital intensive method = $14
Total contribution at annual sales of x units = $14*x
Total fixed costs under capital intensive method = $3,010,000
Profit under capital intensive method = 14x - $3,010,000
Labor-Intensive manufacturing
method:
Contribution/unit in labor-intensive method = $10
Total contribution at annual sales of x units = $10*x
Total fixed costs under labor-intensive method = $2,040,000
Profit under labor intensive method = $10x - $2,040,000
The profits under the two methods should be equal for the Martinez Company to be indifferent.
10x - $2,040,000 = 14x - $3,010,000 x = 242,500 units
The Martinez Company is indifferent when the sales are 242,500 units as the net profit. On the other hand, when sales are more than 242,500 net profit under capital-intensive manufacturing method is higher. When the sales are lower than the indifference point, the labor-intensive manufacturing method will result in higher profits.
c. Explain the circumstances under which Martinez should employ each of the two manufacturing methods.
When there is a shortage of labor in the market and when the company can adapt to change is when Martinez should employ the capital-intensive method. There will be large profits compared to labor intensive manufacturing method when Martinez Company is greater than the point of indifference.