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    Calculation of the break even point for Mower Manufacturing

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    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

    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 $16.25. 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.
    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?

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    Solution Preview

    Sales (25,000 units × $25) $625,000
    Less variable costs 468,750
    Contribution margin $156,250
    Less fixed costs 125,000
    Profit $ 31,250

    1. Calculate the company's break-even point in sales dollars and units.
    Per unit
    Sales= 625000 25
    Variable costs= 468750 18.75
    Contribution Margin 156250 6.25
    Less Fixed ...

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    The response shows the steps of calculation of the break even point for Mower Manufacturing

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