Capital-Intensive Manufacturing Method in Order to Properly

Capital-Intensive Manufacturing Method In order to properly calculate the estimated break-even point in annual unit sales of the new product if Martinez Company uses the capital-intensive manufacturing method, the first step is to add the manufacturing cost of this methodology. On a per unit basis, those costs are $5 +$6+$3 for a total of $14 per unit. Therefore, for every unit sold the company will profit $16, which is that $14 minus the $30 unit sales price.

While the company is profiting $16 for each unit sold, it has a fixed manufacturing cost of $2,508,000 for choosing this particular methodology. Additionally, the company must compensate for an annual incremental selling expense of $502,000 as well as $2 for each unit sold. It has been noted that, "the incremental cost of selling an additional item is the difference between the cost of selling with the item included and the cost of selling without it" (No author, no date, p. 20).

Therefore, without factoring in the incremental selling expenses, one can calculate that by dividing the fixed manufacturing cost of $2,508,000 by the profit gained from each unit, $16, the company would need to sell 156,750 units annually. However, for each unit sold they have a cost of $2 in addition to a $502,000 annual cost. Thus, to sell 156,750 units the company incurs an additional cost of $2; $2 times 156,750 units is $313,500. This figure must be added to the $502,000 annual fee which comes to $815,550 total. These costs divided by the $16 profit comes to approximately 50,969 units.

Therefore, this amount of units plus the initially calculated 156,750 annual units means the Martinez Company must sell approximately 207,718 units to break even using the capital-intensive method. (A) 2. The profit from using the labor intensive method is $12 per unit, which is determined by adding the estimated manufacturing cost per unit of $5.50+$8.00+$4.50 (which is $18) and subtracting that from the requisite $30 sales price per unit. The fixed manufacturing cost for this methodology is $1,538,000.

Therefore, to discern how many units need to be sold to break even, it is necessary to divide the fixed manufacturing cost by the profit gained from each unit ($12) which comes out to approximately 128,167 units. However, the company still needs to factor in the $2 for each unit incremental selling expense. Therefore, the selling of 128,167 units will incur an additional expense of $256,334, which is 128,167 multiplied by 2. This figure must be added to the $502,000 annual incremental selling expense which equals $758,334.

This total expense divided by the margin of profit of $12 is approximately 63,195 units which, when added to the initial units sold of 128,167 comes out to 191, 362 units sold for Martinez Company to break even using the labor-intensive manufacturing method. (B) The Martinez Company would be indifferent between the two manufacturing methods if they could reach an annual unit of sales that would allow them to break even or to turn a profit using either method.

Specifically, it would be indifferent to the manufacturing methods at a volume in which the costs were the same, although there are also considerations regarding supply chain management and relationships fostered by it that would impact which method would truly be more beneficial to the organization (Hendricks and Singhal, 2003, p. 501). That volume is best represented by the mathematical unknown x. Therefore, the variable cost of selling for the capital-intensive method is $14x, while that for the labor-intensive method is 18x.

These variables would need to be added to the total fixed costs. For the capital-intensive method the total fixed costs are $2,508,000+ $502,000 which is $3,010,000. For the labor-intensive method the fixed cost total is $1,538,000+$502,000 which comes to $2,040,000. The equation that best represents the addition of the total fixed costs to the variable cost of selling for both the capital and labor-intensive methods is $14x +$3,010,000=18x+$2,040,000. By subtracting 14x from 18x one is left with 4x; by subtracting $2,040,000 from $3,010,000 one is left with $970,000 so that the equation now reads $970,000=4X.

$970,000 divided by 4x= 242,500, which is the total number of annual sales for which the costs of the capital-intensive and labor-intensive methods are equal. Therefore, by selling 242,000 annual units, the company could be perfectly indifferent as to which method it employs.

(C) In order to consider the circumstances in which the Martinez Company would ideally want to utilize each of these two respective methods, the capital-intensive and the labor-intensive one, one must consider not only the break-even points but also the point at which the annual sales unit volume would make the company indifferent to its choice.