Question

I tried all solutions and numbers for b and c and nothing seemed to be right.

Answer 1

Answer :

a. Reconstruct income statement using contribution margin format-

JOEL COMPANY
Income Statement
For the Year Ended 31 December, 2018
Sales revenue	$ 250,000
Less : Variable Costs
Cost of goods sold	(130,000)
Sales commission	(25,000)
Shipping and handling expenses	(2,000)
Contribution Margin	$ 93,000
Less : Fixed Costs
Administrative salaries	(30,000)
Advertising expense	(20,000)
Depreciation expense	(24,000)
Net Income (EBIT)	$ 19,000

b.	Operating Leverage	4.89	times
c.	Net income	$ 28,291

Working Notes :

1. Operating Leverage = Contribution Margin ÷ EBIT

= 93,000 / 19,000 = 4.89 ( or rounded to 4.90)

2. Degree of Operating Leverage

= % Change in EBIT ÷ % Change in Sales

That is,

4.89 = % change in EBIT ÷ 10

% Change in EBIT = 4.89 × 10 = 48.9

3. % Change in EBIT (Net Income ) =

(Change in Net income ÷ Net Income ) × 100

48.9 =( Change in Net income ÷ 19,000) × 100

Change in Net income = $ 9,291** ( See below)

4. New Net Income = $ 19,000 + 9,291 = $ 28,291

** If not rounded, your in Net Income is $ 28,300.

That is, change in net income =[{(93,000/19,000)×10}×19000] ÷ 100 = 9,300