Question

Exercise 11-15 Using contribution margin format income statement to measure the magnitude of operating leverage LO 11-3, 11-4 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 $167) 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 $4) Net income $1,085,500 (552,500) 533,000 (54,275) (86,000) (36,000) (41,000) (26,000) $ 289,725 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 10 percent.

Answer 1

Contribution margin income statement

Sales	1085500
Less: Variable cost
Cost of goods sold	552500
Sales commission	54275
Shipping and handling expense	26000
Total variable cost	632775
Contribution margin	452725
Less: Fixed cost
Administrative salaries expense	86000
Advertising expense	36000
Depreciation expense	41000
Total Fixed cost	163000
Operating income	289725

Degree of operating leverage = Contribution margin/Operating income = 452725/289725 = 1.56

Operating income increase by (1.56*10) = 15.60 or 16%