She learned that the forge had thrived making titanium implants for joint replacements, but that business had shifted to China. In fact, the owner of the forge admitted that for the last few months Lucia had been his only customer. He operated a forge with a minimum crew of ten, each able to operate all the equipment in the forge. Her current volume of $1,000$ units required only one week of labor. She asked if the workers could produce more than $1,000$ units per week, and the owner speculated $$about $1,100$ units$.$ She realized she would need all ten workers if her demand increased to $4,000$ units per month. The forge was in operation twelve months a year but shut down periodically for vacations and forge maintenance. Lucia could count on forty$-$eight weeks of production capacity annually.

The workers were paid wages of $$65,000$ each, including benefits like holiday and vacations. Operating costs $($fuel$,$ property taxes, insurance, maintenance, and utilities$)$ totaled $$100,000$ last year. Lucia estimated administration costs to be around $$1,000$ a month, or $$12,000$ per year. Finally, the forge owner offered to sell the forge for $$50,000,$ IF Lucia agreed to retain all ten of the forge workers at their current salary. Lucia would depreciate the forge over $10$ years using Straight Line depreciation.

The third phone call was to her father. She explained the offer to him; She would quit school to devote $100\%$ of her time to running the business. Even though Italians are very entrepreneurial, he had misgivings. Despite his concerns, he agreed to loan Lucia the purchase price, at $1\%$ annual interest, with the principal due in five years. He wanted to encourage her ambitions.

$2.$ Which costs are variable, and which costs are fixed? $(10$ pts$)$

$3.$ What is the relevant range for the forge $($on an annual basis$)?(10$ pts$)$

$4.$ Is Direct Labor variable or fixed, and why? $(10$ pts$)$

$5.$ Calculate her breakeven units. $(10$ pts$)$

$6.$ Calculate her Margin of Safety in units $($for both baseline and $10\%$ increase$).$