The Sanchez 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:
Capital-Intensive
Direct Materials 5$ per unit
Direct Labor 6$ per unit
Variable Overhead $3 per unit
Fixed Manufacturing Costs $2,508,000
Labor Intensive
Direct Materials 5.5$ per unit
Direct Labor 8$ per unit
Variable Overhead $4.5 per unit
Fixed Manufacturing Costs $1,538,000
The Martinez Company 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.
Required:
a) Calculate the estimated break-even point in annual unit sales of the new product if the Sanchez Company uses the:
Capital intensive method
Labor Intensive method
b) Determine annual unit sales volume at which the Sanchez Company would be indifferent between the two manufacturing methods
c) Explain the circumstance under which the Sanchez Company should employ each of the two manufacturing methods