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:
Direct Materials
Direct Labor
Variable Overhead
Fixed manufacturing costs
Capital Intensive
$5 per unit
$6 per unit
$3 per unit
$2,508,000
Labor Intensive
$5.50 per unit
$8.00 per unit
$4.50 per unit
$1,538,000
Maritnez’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.
Instructions:
a. Calculate the estimated break-even point in annual unit sales of the new product if Martinez Company use the:
(1) Capital-intensive manufacturing method
(2) Labor-intensive manufacturing method
b. Determine the annual unit sales volume at which Martenez Company would be indifferent between the two manufacturing methods.
c. Explain the circumstances under which Martinez should employ each of the two manufacturing methods.
After you show the calculations for each one please provide an explanation on what the answer means and how you got the answer so that I can thoroughly be able to explain it in my paper, thanks!!!!
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