Question

The following income statement was drawn from the records of Butler Company, a merchandising firm:

BUTLER COMPANY Income Statement For the Year Ended December 31, 2014
Sales revenue (4,000 units × $161)	$	644,000
Cost of goods sold (4,000 units × $86)		(344,000	)
Gross margin		300,000
Sales commissions (5% of sales)		(32,200	)
Administrative salaries expense		(90,000	)
Advertising expense		(37,000	)
Depreciation expense		(42,000	)
Shipping and handling expenses (4,000 units × $5)		(20,000	)
Net income	$	78,800

       

Required
a.	Reconstruct the income statement using the contribution margin format.

      

b.	Calculate the magnitude of operating leverage. (Round your answer to 2 decimal places.)

      

c.	Use the measure of operating leverage to determine the amount of net income Butler will earn if sales increase by 10 percent. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)

Answer 1

a. BUTLER COMPANY Income Statement For the Year Ended December 31, 2014 Sales revenue $644.000 Less: Variable costs Cost of goods sold $344.000 Sales commissions $32.200 Shipping and handling expenses $20,000 $396,200 Contribution margin $247.800 Less: Fixed costs Administrative salaries expense $90,000 Advertising expense $37.000 Depreciation expense $42.000 $169,000 Net income $78,800 Oprating Leverage = Contribution margin / Net Income = $247.800 / S78.800 3.14 times c. If 10 % increase in sale revenue will produce a 31.4% increase in net income. (10 * 3.14 = 31.4%) Since Net income increase to $103,543 [$78.800 + (S78.800 * 31.4 %)]