O'Hara Company makes a product that it sells for $200. O'Hara incurs annual fixed costs of $250,000 and variable costs of $160 per unit.
Required
The following requirements are interdependent. For example, the $50,000 desired profit introduced in Requirement c also applies to subsequent requirements. Likewise, the $180 sales price introduced in Requirement d applies to the subsequent requirements.
a. Determine the contribution margin per unit.
b. Determine the break-even point in units and in dollars. Confirm your answer by preparing an income statement using the contribution margin format.
c. Suppose that O'Hara desires to earn a $50,000 profit. Determine the sales volume in units and dollars required to earn the desired profit. Confirm your answer by preparing an income statement using the contribution margin format.
d. If the sales price drops to $180 per unit, what level of sales is required to earn the desired profit?
Express your answer in units and dollars. Confirm your answer by preparing an income statement using the contribution margin format.
e. If fixed costs drop to $200,000, what level of sales is required to earn the desired profit? Express your answer in units and dollars. Confirm your answer by preparing an income statement using the contribution margin format.
f. If variable costs drop to $130 per unit, what level of sales is required to earn the desired profit?
Express your answer in units and dollars. Confirm your answer by preparing an income statement using the contribution margin format.
g. Assume that O'Hara concludes that it can sell 5,000 units of product for $180 each. Recall that variable costs are $130 each and fixed costs are $200,000. Compute the margin of safety in units and dollars and as a percentage.
h. Draw a break-even graph using the cost and price assumptions described in Requirement g.