The Martinez Company is using costing methods to determine whether they should go with a labor-intensive manufacturing method or capital-intensive manufacturing method. While determining which method they should take it is important to understand at what point they would break-even with costs and revenues, to determine if they will at least break-even at the end of the year, as opposed to being in debt. It is also important to determine to volume at which the company should produce with each method to determine how much would have to be produce by each method to have equal use of their revenues to costs. And finally we need to explain when it would be best to use each method. (Kimmel, Weygandt, & Kieso, 2011).
The break-even analysis is used to determine when total revenues equal total costs, both fixed and variable. The capital-intensive manufacturing method would break-even at $4,702,500 costs to revenues, while the labor intensive method would break-even at just $3,845,000. These numbers were found using an equation where variable costs, fixed costs, and net income are added together. The net income is set at zero because we want to simply know what we have to have in revenues to break-even, without an income. (Kimmel, Weygandt, & Kieso, 2011).
When determining the volume of units that need to be sold, we look at how many units need to be sold to break-even. The capital-intensive method would have to produce 156,750 units to break-even, while the labor-intensive method would only produce 128,167 units to break even.
To determine which method should be employed for the Martinez Company we need to look at the break-even analysis and the volume needed to be produced to break-even. The capital-intensive method appears to be more efficient even though it has a higher break-even rate, because it produces more at one time than the labor-intensive method, which will in turn allow for more products to be produced at one time and be available for sale than the labor intensive method. (Kimmel, Weygandt, & Kieso, 2011).
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for Business Decision Making (4th ed.). Retrieved from The University of Phoenix eBook Collection database.