Question

ine toliowing income statement appiles to Kawai Company ror tne current year Income Statement Sales revenue (200 units x $60) Variable cost (200 units $36) Contribution margin $12,000 (7,200) 4,800 (1,600) Fixed cost Net income $3,200 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 Kawai Company will earn if it experiences a 10 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 10 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. Req A and B Req C1 Req 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 Kawai Company will earn if it experiences a 10 percent increase in revenue. The sales price per unit is not affected. (Do not round intermediate calculations. Round "Operating leverage" to 1 decimal place.) Show less A

Answer 1

a)

Degree of operating leverage = Contribution margin/Net income

= 4,800/3,200

= 1.5

b)

Increase in sales = 10%

Increase in net income = Increase in sales x Degree of operating leverage

= 10 x 1.5

= 15%

Increase in net income = 3,200 x 15%

= $480

c-1)

Contribution margin income statement

Sales (220 x 60)	13,200
Variable cost (220 x 36)	- 7,920
Contribution margin	5,280
Fixed cost	- 1,600
Net income	$3,680

C-2)

Percentage change in net income = Increase in net income/Initial net income

= 480/3,200

= 15%

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubt. Thanks.