Question

The following income statement was drawn from the records of Gibson Company, a merchandising firm: GIBSON COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (7,000 units X $162) $1,134,000 Cost of goods sold (7,000 units * $85) (595,000 Gross margin 539,000 Sales commissions (108 of sales) (113,400) Administrative salaries expense (87,000) Advertising expense (37,000) Depreciation expense 41,000) Shipping and handling expenses (7,000 units X $2) Net income 246,600 Required a. Reconstruct the income statement using the contribution margin format. b. Calculate the magnitude of operating leverage. c. Use the measure of operating leverage to determine the amount of net income Gibson will earn if sales increase by 10 percent. Complete this question by e Req A Req B and C Reconstruct the income state GIBSON COMPANY Income Statement For the Year Ended December 31, 2018 Less: Variable costs lol Less: Fixed costs Req B and C >

Answer 1

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Part A
Sales			$   1,134,000
Less: Variable Expense
Cost of Goods Sold		$   595,000
Sales Commission		$   113,400
Shipping and handling expense		$      14,000	$     (722,400)
Contribution margin			$       411,600
Less: Fixed Expense
Administrative Salaries Expense		$      87,000
Advertising Expense		$      37,000
Depreciation Expense		$      41,000	$     (165,000)
Net Income			$       246,600
Part B
Operating Leaverage			1.67	times
Cont Margin/Net Income
Part C
10% sale increase will increase Net income by	1.67*10	16.7%
New Income $246,600+($246,600*0.167)		$   287,782