In this paper the Broadening Your Perspective Exercise 18.1 is completed. The exercise is about Martinez Company that has decided to introduce a new product to its product line (John Wiley & Sons, Inc. 2011). Two methods are evaluated to determine what is the best method to use either capital-intensive or labor-intensive method.

Exercise 18-1 A

In this part of the exercise the break-even point in annual unit sales of the new product is calculated for the capital intensive manufacturing method and labor-intensive manufacturing method (John Wiley & Sons, Inc. 2011). To calculate the break-even point the total fixed cost has to be computed first. For the capital-intensive method the total fixed cost is fixed Manufacturing cost-2508000 plus incremental selling expenses of 502000 equaling 3010000. The next step is to find the contribution margin per unit. For the capital-intensive method the contribution margin per unit is calculated by the selling price of 30.00 minus the variable cost of direct materials-5, direct labor-6, variable overhead-3, annual expense-2, thus equaling $14.00. Then the break-even point in unit sales for the capital-intensive method is calculated by the total fixed cost-3010000 divided by the contribution margin per unit of 14, thus equally the break-even point in unit sales for the capital-intensive method is 215000 units.

Next we calculate the labor-intensive method. To calculate the break-even point the total fixed cost has to be computed first. For the labor-intensive method the total fixed cost is fixed manufacturing cost-1538000 plus incremental selling expenses of 502000 equaling 2040000. The next step is to find the contribution margin per unit. For the labor-intensive method the contribution margin per unit is calculated by the selling price of 30.00 minus the variable cost of direct materials-5.50, direct labor-8.00, variable overhead-4.50, annual expense-2, thus equaling $10.00. Then the break-even point in unit sales for the labor-intensive method is the total fixed cost-2040000 divided by the contribution margin per unit of 10, thus equally the break-even point in unit sales for the labor-intensive method is 204000 units.

Exercise 18-1 B

In the next part of the exercise it states to determine the annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods (John Wiley & Sons, Inc. 2011). To determine the indifference point of the annual unit sales of the capital-intensive and labor-intensive method the total fixed cost and contribution is used. This is calculated by capital-intensive total fixed cost of 3010000 minus labor-intensive total fixed cost of 2040000 divided by the difference of the contribution margins of capital-intensive-14 and labor intensive-10. Thus totaling 242500 units as the indifference point of the two manufacturing methods.

Exercise 18-1 C

The last question to complete the exercise states, Explain the circumstance under which Martinez should employ each of the two manufacturing methods (John Wiley & Sons, Inc. 2011). Depending on the goal or forecast of how much sales are to be reached determines the manufacturing method that should be used. If the business expects to reach sales beyond the indifference point of 242500 units then the capital-intensive method would be the best manufacturing method to be used. If sales are forecasted to be below 242500 then the labor intensive method should be used. Thus the ationale to choose the manufacturing method depending on sales of units assures that the higher profit margin is obtained.

References

John Wiley & Sons, Inc. (2011). Accounting, 4E, Exercise 18-1. Retrieved from: www.ecampus.phoenix.edu/wileyassignment

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