6-4. Nonlinear Cost Structure and Breakeven Analysis Frank Alexander was President of the Mason Company, a small producer of valves in a highly competitive marke him great cost. Standard capaci level ( t. A recent drop in the price of the valves has caused oncern. since the price was now below the Mason Company's standard cost was determined from operating at 80 percent of the maximum ty of 10.000 valves per month. Alexander did not normally operate above this of 8.000 valves per month) since the higher production required overtime work t c that significantly increased variable costs. The fixed costs of the Mason Company were $40.000 per month and variable costs were S15 per valve for production levels up to 8,000 valves per month. Con- sequently the standard cost of the valve was set at a $20, based on operating at the desired level of 80 percent of capacity. Normally the price of the valve ranged from 21 to S23 allowing a small but adequate return on the Mason Company's modest investment in machinery and facilities. For production above the standard volume, unit variable costs for the a tional units increased by: s percent above the normal variable cost for volume between 30 and 33 percent of capacity: 20 percent above the normal variable cost for volume between 85 and 90 percent of capacity: 30 percent above the normal variable cost for volume between 90 and 100 percent of capacity. Recently, the price of the valves had dropped about 10 percent to $19 per valve. Mr. Alexander felt he was now in a no-win situation since he was losing n every valve he was selling. While he saw some opportunities for increasing his sales volume above the current level of 8.000 units per month. he felt this would only make matters worse. since he felt he was losing money at current volumes and the variable costs on the additional units produced would be even higher. Required: . Comment on Frank Alexander's analysis of the price-cost squeeze in which he now finds himself. At what point would you recommend that he actually turn down orders at 519 per valve. Assuming the price returns to its previous level of S21. at what volumes would the Mason Company operate profitably? 2