Question

The following income statement applies to Solomon Company for the current year: Income Statement Sales revenue (420 $15,960 units x $38) Variable cost (420 (9,660) units x $23) Contribution margin 6,300 Fixed cost (4,800) Net income $ 1,500 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 Solomon Company will earn if it experiences a 15 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 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. Reg A and B Requirement Requirement CI C2 Use the contribution margin approach to calculate the magnitude of operating leverage. Afterwards, use the operating leverage measure previously computed for Requirement A to determine the amount of net income that Solomon Company will earn fit experiences a 15 percent increase in revenue. The sales price per unit is not affected. (Do not round Intermediate calculations. Round "Operating leverage to 2 decimal place.) Show less a b. Operating leverage Net income Re AB Requirement C1 >

Answer 1

a) Degree of operating leverage= Contribution margin/Net income

= $6300/1500= 4.20

b) Operating leverage= Percentage change in net income/Percentage change in sales

4.20= Percentage change in net income/15%

Percentage change in net income= 4.2*15%= 63% increase

Net income= $1500*1.63= $2445

a.	Operating leverage	4.20
b.	Net income	$2445

c-1)

Annual Income Statement
Sales revenue ($15960*1.15)	$18354
Variable cost ($9660*1.15)	(11109)
Contribution margin	7245
Fixed cost	(4800)
Net income	$2445

c-2) Percentage change in net income= ($2445-1500)*100/1500= 63%