Decision Making Across the Organization - Essay Example

Decision Making Across the Organization a) Calculate the estimated break-even point in annual unit sales of the new product if Martinez Company uses the: (1) Capital-intensive manufacturing method. Capital intensive manufacturing method entail a method of production that requires large amounts of capital investments to produce goods and services. For example the amount of financial resources required under this method is substantially high (Weygandt, Kieso & Kimmel, 2010). This method of production is most common in certain industries such as transport industries, telecommunication industry, airline industry and railway industry.

Therefore, Martinez Company may use this method to determine the break-even point in annual unit sales of the new product. The break even points may be computed as follows; if Martinez’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. Therefore, it is vital to note that the incremental and $2 are irrelevant cost in this case because irrespective of their presence they may not affect organisation decision making (Weygandt, Kieso, & Kimmel, 2010) Variable cost Direct materials $5 per unit Direct labor $6 per unit Variable overhead $3 per unit Total Variable Cost $14 Fixed Cost Fixed manufacturing costs $2,508,000 Break Even Point= Fixed Costs Price-Variable Cost per Unit Break Even Point=$2508, 000=156750Unit $30-14 (2) Labor-intensive manufacturing method.

Labor intensive method entails a production method that utilizes more labor and little capital to produce substantial amounts of goods and services. Under this method, a lot of task might be involved and therefore, substantial amount of salary expense incurred (Weygandt, Kieso & Kimmel, 2010). Labor-Intensive Intensive Direct materials $5.50 per unit Direct labor $8.00 per unit Variable overhead $4.50 per unit $18.0 Fixed Cost Fixed manufacturing costs $2538, 000 Break Even Point= Fixed Costs Price-Variable Cost per Unit Break Even Point=$1,538,000=128167Units $30-18 (b) Determine the annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods.

First manufacturing method Sales Volume=selling price? Sales Units Sales Volume=$30?156750Unit =$4,702,500 Fixed Cost =$2,508,000 Total Variable cost=$16?156750Unit=$2508000 0 Second Manufacturing method Sales Volume=$30?128167Units =$3845010 Fixed Cost =$1,538,000 Total Variable cost=$12?128167Units =$1538004 4 (c) Explain the circumstance under which Martinez should employ each of the two manufacturing methods In order to determine the circumstance under which Martinez Company may utilize either capital intensive or labor intensive method of production, it is important to take into considerations the three basic factors namely; company size, product and production cost.

Company size entails taking into account whether the company is large enough to utilize capital intensive method which requires huge amount of initial investments. In terms of product, it is vital to determine the nature and quantity of product being produced because some products may be better produced using machines rather than labor in order to save cost and prevent the company from incurring losses (Weygandt, Kieso, & Kimmel, 2010). Martinez should utilize Capital intensive method in a circumstance when the company wants to increase the amount of output.

This is because machines are involved to produce and hence, the level of output is substantially higher. In addition, Capital intensive method may be used if Martinez Company has necessary ability to incur huge capital investments associated with this method. For example, the company should be ready to incur the cost of procuring some new production machine, installation cost as well as cost of training employees on how to use the new machines. However, this method tends to have some limitations such as: initial cost attributed to acquisition of machines, training and installation of equipments is substantially higher.

In addition, capital intensive method lacks flexibility. For example this method may not respond to decline in market demand unlike labor intensive method where a company y may utilize part time employees in production of goods and services. Additionally, capital intensive method discourages creativity and innovation because every task is executed by the machines and hence no new ideas that can be developed(Weygandt, Kieso, & Kimmel, 2010). On the other hand Martinez Company may apply labor intensive method if the company size is small and if there is no enough capital to use labor intensive method.

Some of the benefits of labor intensive method include; this method tends to be flexible because during low high seasons temporally employees could be hired. In addition, it encourages creativity and innovation because workers are directly linked to the task. Whereby, in case of challenges they can be able to be creative and innovative to address their problems. However, this method tends to be relatively expensive in the long run as compared to capital intensive method (Lussier, 2009). References Lussier, R. N. (2009).

Management fundamentals: Concepts, applications, skill development. Mason, OH: South-Western. Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2010). Managerial accounting: Tools for business decision making. Hoboken, NJ: Wiley.