Question: Plainfield Bakers, manufactures & sells a popular line of fat-free cookies under the name Aunt May’s Cookies. The process Plainfield uses to produce 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 dollar 1.50 per dozen, & fixed costs for the year totaled $150,000.
Required
[1] Make a contribution-margin income statement for last year.
[2] Compute firm’s contribution-margin ratio & breakeven point in sales units for last year.
[3] Plainfield’s direct labor rate is increasing up $0.40 a dozen next year. Suppose that the selling price stays at $2.50 a dozen, compute next year’s contribution margin and breakeven point in sales units.
[4] 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 firm undertakes the automation project, how would its contribution margin and breakeven point in sales units affected?
[5] Suppose that Plainfield does go ahead with the automation project , how many dozen cookies would the company have to sell dollar 2.50 a dozen to earn the same income it earned last year?
[6] 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?