Canadian Managerial Accounting Cases 6.2 Au Naturel Incorporated Contributed by Adjunct and Emeritus Professor, Athabasca University, Athabasca Sandy Kiran Au Naturel Incorporated is feeling growing pains. After a successful first two years of operations. Au Naturel management in for the first time, concerned about the potential of their business. The company began operations in 2012 when the owner and founder, Jason Petrow, decided to enter the organic foods market. In carly 20X1, after watching a documentary on food additives. Jason began purchasing organic foods for his family. Over the years, he noticed substantial growth in the comic section at the grocery store. Considering this opportunity, Jason thought he could use his background in food preparation and production to start his uw organic foods company Jason decided to open his business with a product that was it well represented anstee shelvesceganie peanut butter. He developed an ceanic peanut butter to be marketed under the Naturel brand and started manufacturing in February 2012 In the beginning, manufacturing peanut butter at the Au Nature factory was a highly labour intensive process. The factory used assembly-line production model and each jar of peanut butter was handcrafted by six factory employees. Hy 203, Au Naturel was producing over 300 jars of peanut butter per day. Produc tion schedules were based on demand volumes and employee hours varied from employee to employee each weck. As a result, the company had high direct costs, which varied with the level of production Direct costs included peanuts, packaging materials, manufacturing labour costs, and variable overhead costs. Indirect fined costs were less substantial and mainly included production supervision, depreciation on equipment warehouse, and property With increasing demand levels (exhibit 1) and a capacity of only 100.000 jars of peanut butter per year using the existing process, Au Naturel management decided it was time to automate the factory At the beginning of 20X4, the company inwested 52 million in new automation equipment that would be depreciated over a 10-year period. This enabled the plant to reduce its staffing from six to one factory worker and increase annual capacity to 180,000 jar of peanut butter. With the new automation process one factory employee was retrained to be a plant pervisor with a salary of $63.000 per year. Although the product would no longer be handcrafted, the company believed that the high quality ingredients and the company's attention to standards, cleanliness, and exceptional taste would maintain its image as a specialty food product.ason was hoping if this expansion was successful to complete a further expansion in 2016 of $2.5 million to increase plant capacity to 400.000 ars per year At the end of 20X4, however, Jason was shocked by the financial results of the automation implementa tion. Profits had fallen from the previous year even though sales increased by 20.000 units Exhibit provides a.comparison of the incomes for 2013 and 2014 Jason was worried! The automation of his factory seemed to have had a detrimental effect on profits Jason calculated that with total costs of $8.89 per unit (54.15 $3.96 $0.20 +0.58), he will only achieve a net income of 130.00 (50.90 x 145,000 units) in 20s if Au Naturel meets the expected demand levels This is less than what he was carning in 2013 using the labour-intensive process. lason is now wondering if automation was worth it. In the past, he could promote his peanut butter as a "handcrafted product. Now he is wondering what advantage, if any, automation brings to his factory Jason has asked Ama Chui, an old friend and cost accountant to help himse further how the automation of the Au Naturel factory has impacted the company's bottom line. Chapter 6: Techniques for Measuring Fixed and Variable Costs 27 Required Assume the role of Anna and prepare a report for Jason looking at the following: (a) Is Jason correct in stating that his income for 20x5 will be approximately $130,500? What flaws, if any, are there in Jason's assumptions regarding cost behaviour? (b) If the revenues and cost rates remain at the same level as in 20X4, what should Au Naturel's net income be estimated at for 20X5? 20X6? (c) Since the capacity of the new automated factory is only 180,000 jars of peanut butter (a level that will be reached in 20X6), should the company consider a further expansion of the plant? Assume the additional plant expansion cost will be depreciated over 10 years. For simplicity, assume all revenue and cost rates will remain the same as 204 levels and additional supervision of $68,000 would be required each year. What level of sales would be required to support this investment? If demand levels cap at 236,000 jars, would the further expansion be justified? Provide supporting calculations. Year EXHIBIT 1 - DEMAND LEVELS FOR AU NATUREL ORGANIC PEANUT BUTTER Demand Level (Jars) 20X3 80,000 (actual demand) 20X4 100,000 (actual demand) 20X5 145,000 (expected) 20X6 180,000 (expected) Canadian Managerial Accounting Cases 6.2 Au Naturel Incorporated Contributed by Adjunct and Emeritus Professor, Athabasca University, Athabasca Sandy Kiran Au Naturel Incorporated is feeling growing pains. After a successful first two years of operations. Au Naturel management in for the first time, concerned about the potential of their business. The company began operations in 2012 when the owner and founder, Jason Petrow, decided to enter the organic foods market. In carly 20X1, after watching a documentary on food additives. Jason began purchasing organic foods for his family. Over the years, he noticed substantial growth in the comic section at the grocery store. Considering this opportunity, Jason thought he could use his background in food preparation and production to start his uw organic foods company Jason decided to open his business with a product that was it well represented anstee shelvesceganie peanut butter. He developed an ceanic peanut butter to be marketed under the Naturel brand and started manufacturing in February 2012 In the beginning, manufacturing peanut butter at the Au Nature factory was a highly labour intensive process. The factory used assembly-line production model and each jar of peanut butter was handcrafted by six factory employees. Hy 203, Au Naturel was producing over 300 jars of peanut butter per day. Produc tion schedules were based on demand volumes and employee hours varied from employee to employee each weck. As a result, the company had high direct costs, which varied with the level of production Direct costs included peanuts, packaging materials, manufacturing labour costs, and variable overhead costs. Indirect fined costs were less substantial and mainly included production supervision, depreciation on equipment warehouse, and property With increasing demand levels (exhibit 1) and a capacity of only 100.000 jars of peanut butter per year using the existing process, Au Naturel management decided it was time to automate the factory At the beginning of 20X4, the company inwested 52 million in new automation equipment that would be depreciated over a 10-year period. This enabled the plant to reduce its staffing from six to one factory worker and increase annual capacity to 180,000 jar of peanut butter. With the new automation process one factory employee was retrained to be a plant pervisor with a salary of $63.000 per year. Although the product would no longer be handcrafted, the company believed that the high quality ingredients and the company's attention to standards, cleanliness, and exceptional taste would maintain its image as a specialty food product.ason was hoping if this expansion was successful to complete a further expansion in 2016 of $2.5 million to increase plant capacity to 400.000 ars per year At the end of 20X4, however, Jason was shocked by the financial results of the automation implementa tion. Profits had fallen from the previous year even though sales increased by 20.000 units Exhibit provides a.comparison of the incomes for 2013 and 2014 Jason was worried! The automation of his factory seemed to have had a detrimental effect on profits Jason calculated that with total costs of $8.89 per unit (54.15 $3.96 $0.20 +0.58), he will only achieve a net income of 130.00 (50.90 x 145,000 units) in 20s if Au Naturel meets the expected demand levels This is less than what he was carning in 2013 using the labour-intensive process. lason is now wondering if automation was worth it. In the past, he could promote his peanut butter as a "handcrafted product. Now he is wondering what advantage, if any, automation brings to his factory Jason has asked Ama Chui, an old friend and cost accountant to help himse further how the automation of the Au Naturel factory has impacted the company's bottom line. Chapter 6: Techniques for Measuring Fixed and Variable Costs 27 Required Assume the role of Anna and prepare a report for Jason looking at the following: (a) Is Jason correct in stating that his income for 20x5 will be approximately $130,500? What flaws, if any, are there in Jason's assumptions regarding cost behaviour? (b) If the revenues and cost rates remain at the same level as in 20X4, what should Au Naturel's net income be estimated at for 20X5? 20X6? (c) Since the capacity of the new automated factory is only 180,000 jars of peanut butter (a level that will be reached in 20X6), should the company consider a further expansion of the plant? Assume the additional plant expansion cost will be depreciated over 10 years. For simplicity, assume all revenue and cost rates will remain the same as 204 levels and additional supervision of $68,000 would be required each year. What level of sales would be required to support this investment? If demand levels cap at 236,000 jars, would the further expansion be justified? Provide supporting calculations. Year EXHIBIT 1 - DEMAND LEVELS FOR AU NATUREL ORGANIC PEANUT BUTTER Demand Level (Jars) 20X3 80,000 (actual demand) 20X4 100,000 (actual demand) 20X5 145,000 (expected) 20X6 180,000 (expected)