Capital-Intensive Manufacturing Method in Order to Properly Essay

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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.

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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,.....

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