2. a. July’s income statement can be completed using data given in the
problem and data derived for June’s income statement above:
PYRRHIC COMPANY
Projected Income Statement
For the Month Ended July 31
Total Per
Unit Percent
Sales (33,000 units)... $247,500 $7.50 100
Less variable expenses... 99,000 3.00 40
Contribution margin... 148,500 $4.50 60
Less fixed expenses... 108,000
Net operating income ... $ 40,500
b. Margin of safety in dollars =Total sales - Break-even sales
=$247,500 - $180,000=$67,500
Margin of safety in dollars
Margin of safety = percentage Total sales
$67,500
= =27.3% (rounded)
$247,500
Contribution margin
Degree of operating= leverage Net operating income
$148,500
= =3.7 (rounded)
$40,500
The margin of safety has gone up since the company’s sales will be
greater in July than they were in June, thus moving the company far-
ther away from its break-even point.
Case 6-32 (continued)
The degree of operating leverage operates in the opposite manner
from the margin of safety. As a company moves farther away from its
break-even point, the degree of operating leverage decreases. The
reason it decreases is that both contribution margin and net operating
income are increasing at the same dollar rate as additional units are
sold, and, mathematically, dividing one by the other will yield a pro-
gressively smaller number.
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