Question

Europa Publications, Inc. specializes in reference books that keep abreast of the rapidly changing political and economic issues in Europe. The results of the company’s operations during the prior year are given in the following table. All units produced during the year were sold. (Ignore income taxes.)

Sales revenue	$	1,950,000
Manufacturing costs:
Fixed		562,000
Variable		967,000
Selling costs:
Fixed		39,000
Variable		69,000
Administrative costs:
Fixed		79,000
Variable		34,000

Required:

1. 1-a. Prepare a traditional income statement for the company.

2. 1-b. Prepare a contribution income statement for the company.

3. 2. What is the firm’s operating leverage for the sales volume generated during the prior year?

4. 3. Suppose sales revenue increases by 15 percent. What will be the percentage increase in net income?

5. 4. Which income statement would an operating manager use to answer requirement (3)?

Prepare a traditional income statement for the company.

	EUROPA PUBLICATIONS, INC. Income Statement For the Year Ended December 31, 20XX $0 Operating expenses: 0 $0

Prepare a contribution income statement for the company.

	EUROPA PUBLICATIONS, INC. Income Statement For the Year Ended December 31, 20XX    Variable expenses: 0 $0 Fixed expenses: 0 $0

What is the firm’s operating leverage for the sales volume generated during the prior year? (Round your answer to 2 decimal places.)

	Operating leverage

Suppose sales revenue increases by 15 percent. What will be the percentage increase in net income? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

	Percentage increase in net income %

Answer 1

$ 1,950,000 $ $ 562,000 967,000 Points from the Given Information Sales Revenue Manufacturing Costs : - Fixed - Variable Selling Costs : - Fixed - Variable Administrative Costs : - Fixed - Variable $ $ 39,000 69,000 $ $ 79,000 34,000 Requirement 1A | Traditional Income Statement Europa Publications, Inc., Traditional Income Statement Particulars $ Sales $ 1,950,000 Less : Cost of Goods Sold $ 1,529,000 Gross Margin $ 421,000 Less : Selling Costs $ 108,000 Less : Administrative Costs $ 113,000 Net Profit $ 200,000

Requirement 1B | Contribution Income Statement Europa Publications, Inc., Contribution Income Statement Particulars $ Sales $ 1,950,000 Less : Variable Costs - Variable Manufacturing Costs $ 967,000 - Variable Selling Costs $ 69,000 - Variable Administrative Costs $ 34,000 Total Variable Costs $ 1,070,000 Contribution Margin $ $ 880,000 Less : Fixed Costs - Fixed Manufacturing Costs - Fixed Selling Costs - Fixed Administrative Costs Total Fixed Costs AA $ $ $ $ 562,000 39,000 79,000 680,000 Net Operating Income $ 200,000 Requirement 2 | Operating Leverage Contribution Margin $ Net Operating Income $ Operating Leverage 880,000 200,000 4.40 Requirement 3 | Percentage Increase in Net Income Percentage Increase in Net Income = Increase in Sales * Degree of Operating Leverage Percentage Increase in Net Income = 15% * 4.40 Percentage Increase in Net Income = 66.00% Requirement 4 To answer the Requirement (3), We need to use Contribution Margin Income Statement since it bifurcates the Costs into Variable and Fixed Costs which will result in the calculation of Contribution Margin, Net Income and Operating Leverage.