Question

The following income statement was drawn from the records of Jordan Company, a merchandising firm: JORDAN COMPANY Income Statement For the Year Ended December 31, Year 1 Sales revenue (5,500 units x $168) Cost of goods sold (5,500 units x $86) Gross margin Sales commissions (5% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (5,500 units × $3) Net income $ 924,000 (473,000) 451,000 (46,200) (85,000) (38,000) (44,000) (16,500) $ 221,300 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 Jordan will earn if sales increase by 10 percent.

Answer 1

a) Contribution margin format

Sales		924000
Less: Variable cost
Cost of goods sold	473000
Sales commission	46200
Shipping and handling expense	16500
Total Variable cost		535700
Contribution margin		388300
Less: Fixed cost
Administrative salaries expense	85000
Advertising expense	38000
Depreciation expense	44000
Total fixed cost		167000
Net income		221300

b) Operating leverage = Contribution margin/Net income = 388300/221300 = 1.75

c) If sales increase by 10% Net income increase by (10*1.75) = 17.50%

Amount of net income = 221300*117.50% = 260027.50 or $260028