Week Five Assignment Alison Eades
ACC/561
December 22, 2014
Jason See

Week 5 Assignment
Exercise 18-1 is about the Martinez Company’s decision to introduce a new product manufacture by either a capital-intensive method or a labor-intensive method. Provided are the manufacturing cost for both methods as well as the estimate. The capital-intensive manufacturing cost estimates are as follow: $5.00 per unit for direct materials, $6.00 per unit for direct labor, $3.00 per unit for variable overhead, and $2,508,000 for fixed manufacturing cost. The labor-intensive manufacturing cost estimates are as follow: $5.50 per unit for direct materials, $8.00 per unit for direct labor, $4.50 per unit variable overhead, and $1,538,000. The company’s research department recommends an introductory unit sale price of $30. The incremental selling expenses are estimated to $502,000 annually plus $2.00 for each unit sold, regardless of which manufacturing method is used. Capital-intensive methodologies of production require higher levels of labor.
A: The estimated break-even point in annual unit sales of the new product is calculated differently dependent on the used method. 1.) With the capital-intensive method, the Martinez Company must calculate total fixed cost first; $2,508,000+$502,000=$3,010,000. The contribution margin per unit must also be calculated through selling price less variable cost ($30-$5-$6-$3-$2=$14). Total fixed cost over contribution margin per unit determines the break-even point in unit sales under the capital-intensive method as 215,000 ($3,010,000/$14). 2.) With the labor-intensive method, the Martinez Company follows similar calculations. Total fixed cost are determined to be $2,040,000 ($1,538,000+$502,000). Contribution margins per unit are calculated as $30-$5.50-$8-$4.50-$2=$10. Total fixed cost over contribution margin per unit determines