Question :

Martinez Company has decided to establish a new product. The new product will be manufactured by either a capital-intensive technique or a labor-intensive technique. The manufacturing technique will not affect the quality of the product. The evaluated 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      $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 evaluated to be $502,000 yearly plus $2 for each unit sold, regardless of manufacturing technique.

Instructions

With the class divided into groups, answer the subsequent.

(a) Determine the estimated break-even point in annual unit sales of the new product if Martinez Company uses the:

1. Capital-intensive manufacturing technique.

2. Labor-intensive manufacturing technique.

(b) Evaluate the annual unit sales volume at which Martinez Company could be indifferent between the two manufacturing methods.

(c) Describe the circumstance under which Martinez should employ each of the two manufacturing methods.