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Martinez Company has decided to set up a new product. The new product can be manufactured by either a capital-intensive process or a labor-intensive process. The manufacturing process will not influence the quality of the product. The estimated manufacturing costs by the two processes 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 suggested an introductory unit sales price of $30. The incremental selling expenditures are estimated to be $502,000 annually plus $2 for each unit sold, in spite of of manufacturing method.

Instructions:

1) Compute the estimated break-even point in the annual unit sales of the new product if Martinez Company utilizes the: 

a) Capital-intensive manufacturing process.

b) Labor-intensive manufacturing process.

2) Find out the annual unit sales volume at which the Martinez Company would be indifferent among the two manufacturing methods.

3) Describe the condition beneath which Martinez must employ each of the two manufacturing methods.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M915944

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