Question

ne following income statement applies to Gibson Company for the current year Income Statement Sales revenue (480 units $32) Variable cost (489 units * $17) Contribution margin Fixed cost Net income $15,360 (8,160) 7, 208 (4,200) $ 3, eee Required m. 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 Gibson Company will earn it experiences a 15 percent increase in revenue. The sales price per unit is not affected. c-1. Verify your answer to Requirement by constructing an income statement based on a 15 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. < Prev 6 of 9 Next > PHILIPS

Answer 1

a)Operating leverage = contribution margin / Net income

                                = 7200 / 3000

                               = 2.4 times

b)Increase in net income = Operating leverage * % increase in revenue

                               = 2.4 * 15%

                              = .36 or 36%

Net income = Current net income (1+% increase)

                = 3000 (1+ .36)

                = 3000 *1.36

               = $ 4080

c-1)

Variable cost ratio =variable cost /sales

                      = 8160 /15360

                      = .53125

Sales [15360 (1+.15)]	17664
variable cost [ 17664 *.53125]	9384
contribution margin	8280
Fixed cost	4200
Net income	4080

c-2)Change in net income = [NI 2 - NI 1]/NI 1

                        =[4080 -3000]/3000

                        = 1080 /3000

                       = .36 Or 36%