Assessment of Decision Making Across the Organization
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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.
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The problem relates to Martinez Company and its decision to introduce a new product. The product can be made either through a capital intensive method or labor intensive method. The quality of the product using either method will be the same. In case the labor intensive method is used, the direct materials, direct labor, and variable overheads increase. The overall effect is that the variable cost is higher in case of labor intensive method but in case of the capital intensive method the fixed costs are higher.
The first task is to calculate the breakeven point in the annual unit sales of the new product. Variable costs especially direct materials plus direct labor is $11.00 for the capital intensive method and $13.50 for the labor intensive method. The contribution margin namely the selling price less variable costs is $19 for capital intensive method and $16.50 for the labor intensive method. The break-even point is 132,000 units for capital intensive method and 93,212 units is the break-even point for the labor intensive method. The contribution margin ratio is 63% for capital intensive method and 55% for the labor intensive method. The Required Sales are $3,960,000 for the capital ...
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