The following income statement was drawn from the records of Zachary Company, a

Question

The following income statement was drawn from the records of Zachary Company, a merchandising firm ZACHARY COMPANY Income Statement For the Year Ended December 31, 2018 $ 747,000 Sales revenue (4,500 units x $166) Cost of goods sold (4,500 units x $84) Gross margin Sales commissions (5% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (4,500 units 378,000 369, 000 (37,350) (83,000) (35,000) (49,000) (18,000) Net income 146,650 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 Zachary will earn if sales increase by 10 percent. Complete this question by entering your answers in the tabs below. Required AReq B and C Reconstruct the income statement using the contribution margin format. ZACHARY COMPANY Income Statement For the Year Ended December 31, 2018 Less: Variable costs

Explanation / Answer

a Sales 747000 Less: Variable costs Cost of goods sold 378000 Sales commissions 37350 Shipping and handling expenses 18000 Total variable costs 433350 Contribution margin 313650 Less: Fixed costs: Administrative salaries 83000 Advertising expense 35000 Depreciation expense 49000 Total Fixed costs 167000 Net income 146650 b Operating leverage = Contribution margin/Net income = 313650/146650= 2.14 times c Net income increase = 10%*2.14= 21.4% Net income = 146650+(146650*21.4%)= $178033 Note: Net income will be $178015 if not rounded off

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