Question

The following income statement was drawn from the records of Campbell Company, a merchandising firm: CAMPBELL COMPANY Income Statement For the Year Ended December 31, 2018 $1,072,500 (559,000) 513,500 (53,625) (84,000) (35,000) (48,000) Sales revenue (6,500 units x $165) Cost of goods sold (6,500 units x $86) Gross margin Sales commissions (58 of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (6,500 units x $2) (13,000) 279,875 Net income 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 Campbell will earn if sales increase by 20 percent.

Answer 1

Answer- CAMPBELL COMPANY

INCOME STATEMENT (The Contribution Margin Method)

FOR THE YEAR ENDED DECEMBER 31, 2018

PARTICULARS		AMOUNT ($)
Sales Revenue		1,072,500
Less: Variable Costs
Cost of Goods sold	$559,000
Sales Commission	53,625
Shipping and handling charges	13,000	625,625
Contribution Margin		$446,875
Less: Fixed Costs
Administrative Salaries	$84,000
Advertising Expenses	35,000
Depreciation Expenses	48,000	167,000
Net Income		$279,875

b-Calculate the magnitude of operating leverage:-

Operating leverage= Contribution Margin/ Net Income

=$446,875/ $279,875

=1.60 times

c-If there is an increase in sales by 20% there will be an increase in operating income. The calculation of percentage increase in operating income is:-

Percentage increase in operating income = Degree of operating leverage *Percentage increase in sales

=1.60*20%

=32%

Thus, a 20% increase in sales revenue will result in 32% increase in net income.

Net Income after increase= Existing net income +(32% * Existing net income )

=$279,875+$279,875*32%

=$279,875+$89,560

=$369,435

So, Campbell will earn $369,435 of net income if sales will increase by 20%.

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