EXERCISE 6-17 (30 MINUTES)

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.