Assessing the magnitude of operating leverage
The following income statement applies to Stuart Company for the current year.
Income Statement | |
Sales revenue (400 units × $25) | $10,000 |
Variable cost (400 units × $10) | (4,000) |
Contribution margin | 6,000 |
Fixed costs | (3,500) |
Net income | $2,500 |
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 Stuart Company will earn if it experiences a 10 percent increase in revenue. The sales price per unit is not affected.
c. 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. Calculate the percentage change in net income for the two income statements.
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