PB, Inc. manufactures and sells a popular line of fat-free cookies under the name of Aunt May. The process PB uses to manufacture the cookies is labor-intensive; it relies heavily on direct labor. Last year PB sold 300,000 dozen cookies at $2.50 per dozen. Variable costs at this level of production totaled $1.50 per dozen and fixed cost for the year totaled $150,000
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. PB's direct labor rate is going to go up to $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. PB management is thinking about automating the production process, a change that would reduce variable costs by $0.60 a dozen but would raise fixed costs by $150,000 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 PB does go ahead with the automation project (see requirement D) how many dozen cookies would the company has to sell at $2.50 a dozen to earn the same income it earned last year?
F. What are some of the non-financial aspects of the automation decision that PB management should consider when deciding whether to embark on the automation project or not?