Computation of break-even-point and contribution margin ratio.
Breakeven Point, Cost Structure, and Target Sales
Plainfield Bakers, Inc. manufactures and sells a popular line of fat-free cookies under the name Aunt
May's Cookies. The process Plainfield uses to manufacture the cookies is labor-intensive; it relies heavily on direct labor. Last year Plainfield sold 300,000 dozen cookies at $2.50 per dozen. Variable
Costs at this level of production totaled $1.50 per dozen, and fixed costs for the year totaled $150,000.
Required
A. Prepare a contribution-margin income statement for last year.
B. Calculate the company's contribution-margin ratio and breakeven point in sales units for last year.
C. Plainfield's direct labor rate is going to go up $0.40 a dozen next year. Assuming that the selling price stays at $2.50 a dozen, calculate next year's contribution margin and breakeven point in sales units.
D. Plainfield's management is thinking about automation the production process, a change that would reduce variable costs by $0.60 a dozen but would raise fixed costs by $150,000 automation a year. If the company undertakes the automation project, how would its contribution margin and breakeven point in sales units be affected?
E. Assuming that Plainfield does go ahead with the automation project [see requirement (D)], how many dozen cookies would the company have to sell $2.50 a dozen to earn the same income it earned last year?
F. What are some of the nonfinancial aspects of the automation decision that Plainfield's management should consider when deciding whether to embark on the automation project or not?