Question

The following income statement was drawn from the records of Campbell Company, a merchandising firm: CAMPBELL COMPANY Income Statement For the Year Ended December 31, Ye Sales revenue (5,500 units X $163) Cost of goods sold (5,500 units x 581) Gross margin Sales commissions (10% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (5,500 units * $5) Net income $ 896,500 (445,500) 451.000 (89,650) (86,000) (32,000) (46,000) (27,500) $ 169,850 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 Campbell will earn if sales increase by 10 percent.

Answer 1

1) Contribution margin income statement

Sales revenue	896500
Variable expense
Cost of goods sold	445500
Sales commission	89650
Shipping and handling expense	27500
Total Variable expense	562650
Contribution margin	333850
Fixed expense
Administrative salaries	86000
Advertising expense	32000
Depreciation expense	46000
Total fixed expense	164000
Net income	169850

b) Operating leverage = Contribution margin/Net income = 333850/169850 = 1.97

c) Net income = 169850*119.70% = $203310