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 Vernon Company, a merchandising firm: VERNON COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (7,000 units X $161) Cost of goods sold (7,000 units * $88) Gross margin Sales commissions (100 of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (7.000 units x $1,127,000 (616,000) 511,000 (112,700) (82,000) (36,000) (41,000) (21,000) Not Income $ 218,300 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 Vernon will earn if sales increase by 20 percent. Complete this question by entering your answers in the tabs below. < Prev 5 of 5 !!! Next

Answer 1

Answer with working is given below

VERNON COMPANY Contribution Margin Income statement а. Sales Less: Variable cost Cost of Goods sold Sales Commission Shipping and handling charges Total Variable Cost Contribution Margin $1,127,000 $616,000 $112,700 $21,000 $749,700 $377,300 Less: Fixed Cost $82,000 $36,000 Administrative expenses Advertising expenses Depreciation expenses Total Fixed cost $41,000 $159,000 $218,300 Net Operating Income (EBIT) Operating Leverage b. $377,300 $218,300 Contribution 1.73 Times EBIT $293,760 Net Income С. Net Income growth 34.57% (Operating Leverage X Sales Increase %)