I do not understand how to determine the amount of net income by a 20% sales inc

Question

I do not understand how to determine the amount of net income by a 20% sales increase with a operating leverage of 1.52 times. Required A Req B and C Reconstruct the income statement using the contribution margin format. FANNING COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue s 1.155 0000 Less: Variable costs 01 602000 e Cost of goods sold Sales commissions Shipping and handing expenses14000 57.750 481,250 Contribution margin Less Fixed costs Administrative salaries Advertising expense Depreciation expense 88,000 35.000 e 41,000 Net income S 317.250 Req B and C >

Explanation / Answer

The operating leverage of 1.52 indicates that every 1% increase in sales will result in a 1.52% (1.52*1%) increase in Net income. Also, every 1% decrease in sales will result in a 1.52% (1.52*1%) decrease in Net income.

Net income increases by 30.4% (1.52*20%)

Net income = $317,250 + ($317,250*30.4%)

= $317,250 + $96,444

= $413,694

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