Last year, O’Meara Co. had sales of $2,000,000, based on a unit selling price of $500. The variable cost per unit was $300, and fixed costs were $720,000. The maximum sales within O’Meara’s relevant range are 5,000 units. O’Meara is considering a proposal to spend an additional $50,000 on billboard advertising during the current year in an attempt to increase sales and utilize unused capacity.
1. Construct a cost-volume-profit chart indicating the break-even sales for last year. Verify your answer, using the break-even equation.
2. Using the cost-volume-profit chart prepared in part (1), determine (a) the income from operations for last year and (b) the maximum income from operations that could have been realized during the year. Verify your answers arithmetically.
3. Construct a cost-volume-profit chart indicating the break-even sales for the current year, assuming that a noncancelable contract is signed for the additional billboard advertising. No changes are expected in the selling price or other costs. Verify your answer, using the break-even equation.
4. Using the cost-volume-profit chart prepared in part (3), determine (a) the income from operations if sales total 4,000 units and (b) the maximum income from operations that could be realized during the year. Verify your answers arithmetically.