Case 6-33 (90 minutes) 1. a. Before the income statement can be completed, we need to estimate the company’s revenues and expenses for the month.

The first step is to compute the sales for the month in both units and dollars. Sales in units would be:

90,000 units (August sales) ÷ 1.20 = 75,000 units sold in July.

To determine the sales in dollars, we must integrate the break-even point, the margin of safety in dollars, and the margin of safety percentage. The computations are:

[pic]

[pic]

If the margin of safety in dollars is 25% of total sales, then the break-even point in dollars must be 75% of total sales. Therefore, total sales would be:

[pic]

The selling price per unit would be:

$1,350,000 total sales ÷ 75,000 units = $18 per unit.

The second step is to determine the total contribution margin for the month of July. This can be done by using the operating leverage concept. Note that a 20% increase in sales has resulted in an 80% increase in net operating income between July and August:

[pic]

Case 6-33 (continued)

Since the net operating income for August increased by 80% when sales increased by 20%, the degree of operating leverage for July must be 4. Therefore, total contribution margin for July must have been:

4 × $135,000 = $540,000.

With this figure, July’s income statement can be completed by inserting known data and computing unknown data:

|PUTREX COMPANY |
|Actual Income Statement |
|For the Month Ended July 31