Introduction
Martinez Company is introducing a new product that may be manufactured by using either one of two methods, capital intensive, or labor intensive method. For the capital intensive method, the manufacturing costs per unit are; direct material at $5.00, direct labor at $6.00, variable overhead costs at $3.00 and fixed manufacturing costs at $2,508,000 for the period. For the labor intensive method costs per unit are; direct materials at $5.50, direct labor at $8.00, variable overhead costs at $4.50 and fixed manufacturing costs at $1,538,000 for the period. The research department of Martinez Company recommended an introductory unit sales price of $30. The selling expenses are approximately $502, 000 annually in addition to $2 for each unit sold regardless of the manufacturing method used.
The second part of the research is to determine how many units the company will have to sell annually for both methods to be equal. To determine this number the company will need to calculate the indifference point. The calculation is the total fixed cost of both methods is subtracted and then divided by the contribution margin per unit for each method. Indifference point = (3,010,000-2,040,000)/(14-10) = 242,500. So the company would have to sell 242,500 units for both methods to be equally profitable. This is good information because based on the manufacturing cost of each production method the company will have to sell a specific number of units to maximize profitability. Based on this number the company will select each method in accordance with the projected number of units to be sold.
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Capital-Intensive Manufacturing vs. Labor-Intensive Manufacturing In the future, the Martinez Company will need to use either capital-intensive or labor intensive method for production. Capital intensive manufacturing method focuses on a high level of capital investment, while labor intensive focuses on a high level of labor investment. Capital intensive manufacturing method is mostly used on a large scale production with automated processes. Labor intensive method is mostly likely used on smaller scale production with personalized products. The capital manufacturing method is also based on whether the organization is producing a standardized product or an exclusive product.
The labor intensive manufacturing method should be used when a substantial amount of customer interaction is needed. Capital intensive manufacturing method can be used when the work is too dangerous for employees. With labor intensive manufacturing method there are lower fixed costs and higher variable costs. With the capital intensive manufacturing method there are higher fixed costs and variable costs. In this case, the capital intensive method would be the preferred choice if the sales are expected to be higher than the indifference number of $242,500.
Capital intensive manufacturing method limits competition by serving as a barrier to entry and as a capital intensive business, the Martinez Corporation can benefit from this. Barriers to entry are obstacles that prevent new companies to function in capital-intensive industries. Capital intensive manufacturing minimizes human error resulting in a more effective and efficient productivity. Another great advantage with capital intensive manufacturing method is the minimal labor impact.
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