Question

The CVP income statements shown below are available for Armstrong Company and Contador Company.

		Armstrong Co.		Contador Co.
Sales		$495,000		$495,000
Variable costs		244,000		55,000
Contribution margin		251,000		440,000
Fixed costs		151,000		340,000
Net income		$100,000		$100,000

(a1) Compute the degree of operating leverage for each company. (Round answers to 2 decimal places, e.g. 1.15.)

		Degree of Operating Leverage
Armstrong
Contador

(b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company.

		Armstrong Company		Contador Company
Contribution MarginSelling ExpensesAdministrative ExpensesTotal Fixed ExpensesVariable CostsSales RevenueTotal Variable ExpensesCost of Goods SoldGross ProfitFixed CostsNet Income/(Loss)		$		$
Contribution MarginVariable CostsSelling ExpensesTotal Fixed ExpensesSales RevenueCost of Goods SoldTotal Variable ExpensesFixed CostsAdministrative ExpensesGross ProfitNet Income/(Loss)
Cost of Goods SoldGross ProfitTotal Fixed ExpensesSales RevenueSelling ExpensesVariable CostsTotal Variable ExpensesAdministrative ExpensesContribution MarginFixed CostsNet Income/(Loss)
Administrative ExpensesNet Income/(Loss)Variable CostsSelling ExpensesTotal Variable ExpensesCost of Goods SoldFixed CostsSales RevenueTotal Fixed ExpensesGross ProfitContribution Margin
Contribution MarginFixed CostsNet Income/(Loss)Variable CostsSales RevenueCost of Goods SoldAdministrative ExpensesTotal Variable ExpensesSelling ExpensesTotal Fixed ExpensesGross Profit		$		$

Answer 1

(a1)	Degree of operating =	Contribution Margin
	Leverage	Net Income
		Degree of Operating
		Leverage
	Armstrong	2.51	=251000/100000
	Contador	4.40	=440000/100000
(b)		Armstrong Company	Contador Company
	Sales Revenue	544,500	544,500
	Variable Costs	268,400	60,500
	Contribution Margin	276,100	484,000
	Fixed Costs	151,000	340,000
	Net Income(loss) $	125,100	144,000