Problem:
Mower Manufacturing's income statement for January 2006 is given below.
Sales (25,000 units × $25) $625,000
Less variable costs 468,750
Contribution margin $156,250
Less fixed costs 125,000
Profit $ 31,250
Question 1. Calculate the company's break-even point in sales dollars and units.
Question 2. The company is contemplating the purchase of new production equipment that would reduce variable costs per unit to $16.25. However, fixed costs would increase to $175,000 per month. Assuming sales of 26,000 units next month, prepare an income statement for both the current and the proposed production methods. Calculate the break-even point (in dollars and units) for the new production method.
Question 3. Comment on the difference (if any) in the break-even point for the new production method. What explains the difference in income at sales of 26,000 units between the two production methods?