Essay on Week 5 Decision Making Across the Organization

621 WordsJan 5, 20143 Pages
Decision Making Across the Organization ACC561 Decision Making Across the Organization The Martinez Company has decided to introduce a new product and would like to evaluate the costs of manufacturing through capital intensive and labor intensive manufacturing methods to determine which of the two methods to employ. The values to be used in the evaluation for capital intensive manufacturing are direct materials at \$5 per unit, direct labor at \$6 per unit, a variable overhead of \$3 per unit, and fixed manufacturing costs of \$2,508,000. The values for material, labor, and overhead are summed to find the total variable cost of \$14. The labor intensive values are direct materials at \$5.50 per unit, direct labor at \$8 per…show more content…
The equation for contribution margin ratio is Contribution Margin per Unit / Selling Price, or \$12/\$30, for a contribution margin ratio of 40%. The break-even point in units is calculated by dividing the fixed costs by the contribution margin per unit value, \$1,538,000 / \$12 = 128,167 units as the break-even point. The fixed costs divided by the contribution margin ratio, \$1,538,000 / 40% = \$3,845,000 break-even point in dollars. Unit Sales Volume of Indifference The volume of unit sales at which the Martinez Company would be indifferent between the two manufacturing methods is calculated as Sales = Variable Costs + Fixed Costs + Net Income. The value for sales is equivalent to the sales price, \$30, multiplied by the number of units sold. Variable costs of \$14 for capital intensive and \$18 for labor intensive are also multiplied by the number of units sold. Fixed costs were provided at \$2,508,000 for capital intensive and \$1,538,000 for labor intensive. Net income is assumed to be \$0. The equation values for 180,000 units under capital intensive manufacturing and 240,000 under labor intensive manufacturing is the volume of units for each method to equal sales of \$2,880,000, the point at which the annual unit sales volume would be indifferent. Conclusion Evaluating the costs of manufacturing help management to make crucial decisions about methods of manufacturing that will result in