Question

The following income statement was drawn from the records of Fanning Company, a merchandising firm:

FANNING COMPANY
Income Statement
For the Year Ended December 31, Year 1
Sales revenue (5,500 units × $164)	$	902,000
Cost of goods sold (5,500 units × $88)		(484,000	)
Gross margin		418,000
Sales commissions (10% of sales)		(90,200	)
Administrative salaries expense		(87,000	)
Advertising expense		(31,000	)
Depreciation expense		(50,000	)
Shipping and handling expenses (5,500 units × $2)		(11,000	)
Net income	$	148,800

Required

1. Reconstruct the income statement using the contribution margin format.

2. Calculate the magnitude of operating leverage.

3. Use the measure of operating leverage to determine the amount of net income Fanning will earn if sales increase by 10 percent

Calculate the magnitude of operating leverage. Use the measure of operating leverage to determine the amount of net income Fanning will earn if sales increase by 10 percent. (Round your intermediate calculations and "Operating leverage" answer to 2 decimal places. Round the "Net income" value to nearest whole d

	b. Operating leverage c. Net income

Reconstruct the income statement using the contribution margin format.

	FANNING COMPANY Income Statement For the Year Ended December 31, Year 1 Less: Variable costs 0 Less: Fixed costs $

Answer 1

Ans: FANNING COMPANY Income statement for the Year Ended December 31, Yeard 909,00 Sales Less! Variable Costs: ($484,000) Cost of Goods sold ($ 90,000) Sales Commission and Expense shipping handling ($11,000) $316,800 Contribution margin Lesse fixed Costs, Administrative Saleries Expenses Advertising expense Depreciation Expense Net Income ($87,000) (3 31,000 ) ($50,000) $146,800 B.) Operating leverage Contribution margin Net Income $ 316,800 $ 148,800 2012 times (-) Net Income - $ 148,800 + (#148,800 227.162 X 10%). :- +180,346

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