Question

the following income statement was drawn from the records of Finch Company, a merchandising firm: Chu FINCH COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (7,000 units x $168) Cost of goods sold (7,000 units * $83) Gross margin Sales commissions (10% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (7,000 units * $3) Net income $1,176,000 (581, 000) 595, een (117,608) (82,280) (39,000) (44,000) (21,800) 291,400 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 Finch will earn if sales increase by 20 percent. < Prev 5 of 9 Next > PHILIPS

Answer 1

$ 1,176,000 581,000 Answer-a: FINCH COMPANY INCOME STATEMENT (Under Variable Costing) For the Year Ended 31, 2018 Sales (7,000 x $168) Cost of goods sold (7,000 $83) Less: Variable non-manufacturing cost: Sales commission (10% of 1,176,000) Shipping and handling expense (7,000 $3) Contribution Margin Less: Fixed cost: Administrative salaries expense 82,000 Advertising expense 39,000 Depreciation expense 44,000 Operating income 117,600 21,000 456,400 $ 165,000 291,400

Answer-b: Contribution margin $ Operating income (Contribution margin-fixed expense) $ Degree of operating leverage (Contribution margin / Operating income) | 456,400 291,400 1.57 times Answer-c: DOL = 1.57 times % change in operating income / % change in sales = 1.57 times % change in operating income / 20 = 1.57 times % change in operating income = 31.4% Percentage increase in net operating income 31.4 %