As Managerial Accountant of the company, you are well aware that Olsen Industries, Inc. has been in the business of crafting high-quality wooden desks for nearly 30 years. As CEO of the company, I am considering ways in which we might increase production efficiency in order to boost our bottom line and enable expansion into new product lines. One change I am considering is the movement from our current labor-intensive process of desk construction to an automated process that will require new machinery and equipment. If we were to move to an automated process, it is my belief that variable production costs will decrease due to improved efficiencies. Simultaneously, fixed production costs would naturally increase as a result of the additional depreciation costs. Below, I have pulled together estimated costs for fiscal 2020 under each scenario. We will keep our selling price at $900 per desk under either process.

I need you to please pull together an analysis for me: How many desks would we need to sell in order to breakeven under each scenario? We plan to produce and sell 8,000 desks in fiscal 2020, and I am confident sales will grow by at least 10% annually beyond that. What kind of operating profit would I see in fiscal years 2020 and 2021 under each of these methods? What is our margin of safety?

Variable cost of goods sold Fixed cost of goods sold (annual) Variable selling and administrative costs Fixed selling and administrative costs (annual) Labor-Intensive Process (current) $490 per unit $1,000,000 $10 per unit $400,000 Automated Process (proposed) $290 per unit $2,600,000 $10 per unit $400,000