CVP computations Garrett Manufacturing sold 410,000 units of its product for $68 per unit in 2011. Variable cost per unit is $60 and total fixed costs are $1,640,000.

1. Calculate (a) contribution margin and (b) operating income.

2. Garrett’s current manufacturing process is labor intensive. Kate Schoenen, Garrett’s production manager, has proposed investing in state-of-the-art manufacturing equipment, which will increase the annual fixed costs to $5,330,000. The variable costs are expected to decrease to $54 per unit. Garrett expects to maintain the same sales volume and selling price next year. How would acceptance of Schoenen’s proposal affect your answers to (a) and (b) in requirement 1?

3. Should Garrett accept Schoenen’s proposal? Explain.