Mower Manufacturings income statement for January 2012 is given below. Sales (25,000 units \$25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$625,000 Less

Chapter 21, Practice Exercises #68

Mower Manufacturing’s income statement for January 2012 is given below.

Sales (25,000 units × \$25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$625,000

Less variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456,250

Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$168,750

Less fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000

Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 33,750

1. Calculate the company’s break-even point in sales dollars and units.

2. The company is contemplating the purchase of new production equipment that would reduce variable costs per unit to \$16. However, fixed costs would increase to \$180,000 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.

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?

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...