Question

Exercise 2-13A Using contribution margin format income statement to measure the magnitude of operating leverage LO 2-3, 2-4 The following income statement was drawn from the records of Stuart Company, a merchandising firm: STUART COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (8,000 units X $170) $1,360,000 Cost of goods sold (8,000 units * $81) (648,000) Gross margin 712,000 Sales commissions (10% of sales) (136,000) Administrative salaries expense (89,000) Advertising expense (31,000) Depreciation expense (41,000) Shipping and handling expenses (8,000 units (8,000) x $1 ) Net income $ 407,000 Required a. Reconstruct the income statement using the contribution margin format. b. Calculate the magnitude of operating leverage. c. Use the measure of operating leverage to determine the amount of net income Stuart will earn if sales increase by 20 percent.

Answer 1

Contribution margin income statement

Sales	1360000
Less: Variable expense
Cost of goods sold	648000
Sales commission	136000
Shipping expense	8000
Total Variable expense	792000
Contribution margin	568000
Less: Fixed expense
Administrative salaries expense	89000
Advertising expense	31000
Depreciation expense	41000
Total fixed cost	161000
Net income	407000

b) Degree of operating leverage = Contribution margin/Net income = 568000/407000 = 1.40

c) Net income increase by 1.40*20 = 28

Net income = 407000*1.28 = 520960