Question

Income Statement Sales revenue (460 units X $39) Variable cost (460 units x $24) Contribution margin Fixed cost Net income $ 17,940 (11,040) 6,900 (4,900) $ 2,000 Required a. Use the contribution margin approach to calculate the magnitude of operating leverage. b. Use the operating leverage measure computed in Requirement a to determine the amount of net income that Stuart Company will earn if it experiences a 20 percent increase in revenue. The sales price per unit is not affected. C-1. Verify your answer to Requirement b by constructing an income statement based on a 20 percent increase in sales revenue. The sales price is not affected. c-2. Calculate the percentage change in net income for the two income statements. Complete this question by entering your answers in the tabs below. Req A and B Req C1 Req c2 Verify your answer to Requirement b by constructing an income statement based on a 20 percent increase in sales revenue. The sales price is not affected. Annual Income Statement Sales revenue Variable cost Contribution margin Fixed cost Net income

Answer 1

a
Contribution margin	6900
Divide by Net income	2000
Operating leverage	3.45
b
Increase in net income	69%	=3.45*20%
Net income	3380	=2000*1.69
c
Annual Income Statement
Sales revenue	21528	=17940*1.2
Variable cost	(13248)	=11040*1.2
Contribution margin	8280
Fixed cost	(4900)
Net income	3380
c2
Percentage change in net income	69%	=(3380-2000)/2000