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?