Owens Company

Breakeven Analysis

Owens Company manufactures product M, which sold for $45 per unit in 2019. For the past several years, sales and operating profit have been declining. On sales of $495,000 in 2019, the company operated near the break-even point and use only 55% of its productive capacity. Bill Owens, your father-in-law, is considering several proposals to reverse the trend of declining sales and operating profit and to maximize use of his production facilities. One proposal under consideration is to reduce the unti elling price to $40. Your father-in-law has asked you to aid him in assessing the proposal to reduce the sales price by $5. For this purpose, he provided the following summary of the estimated fixed and variable costs and expenses for 2020, which are unchanged from 2019:

Variable costs and Expenses:

Prodution costs $18.60 per unit

Selling Expenses 6.20 per unit

General expenses 4.00 per unit

Fixed costs and expenses:

Production costs $120,000

Selling expenses 30,000

General expenses 26400

Required:

1. Determine the break-even point for 2020 in dollars, assuming: no change in sales price, the proposed sales price
2. How much additional sales are necessary for Owens Company to break even in 2020 under the proposal?
3. Determine the operating profit for 202, assuming: no change in sales price and volume from 2019 and the new sales price and change no in volume from 2019.
4. Determine the maximum operating profit for 2020, assuming the proposed sales price.
5. Briefly list factors that you would discuss with your father-in-law in evaluating the proposal.