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 Munoz Company, a merchandising firm: MUNOZ COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (6,500 units X $168) Cost of goods sold (6,500 units X $85) Gross margin Sales commissions (5% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (6,500 units X $3) Net income $1,092, 000 (552, 500) 539, 500 (54,600) (84, 000) (34,000) (46, 000) (19,500) $ 301,400 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 Munoz will earn if sales increase by 20 percent. Complete this question by entering your answers in the tabs below. Required A Reg B and C Reconstruct the income statement using the contribution margin format. MUNOZ COMPANY Income Statement For the Year Ended December 31, 2018 Less: Variable costs Less: Fixed costs Required A Reg B and C >

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer Requirement A) Munoz Company Income Statement For the Year ended December 31,2018 Sales Revenue Less variable Costs Cost of goods sold Sales commission Shipping and handling expense 1092000 -552500 -54600 -19500 e Contribution Margin Adminstrative salaries expense Advertising expense Depreciation expense 465400 -84000 -34000 -46000 Net Income 301400 Requirement b) Operating leverage = contribution margin / net income = 465400 / 301400 != 1.54

19 Requirement b) 20 Operating leverage = contribution margin / net income 21 = 465400 / 301400 22 = 1.54 24 Thus the correct answer is operating leverage = 1.54 times 26 Requirement c) 27 Net income = current net income *(1+(operating leverage *increase in sales)) 28 = 301400 *(1+(1.54*20%) 29 = 301400 *1.308 30 = $394231 32 Thus the correct answer is $ 394231 34 Note, if we don't round of the intermediate calculations, then the answer for requirement c will be $ 394480