Exercise 2-13A Using contribution margin format income statement to measure the

Question

Exercise 2-13A Using contribution margin format income statement to measure the magnitude of operating leverage LO 2-3, 2-4 The following income statement was drawn from the records of Joel Company, a merchandising firm JOEL COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (2,000 units x $125) Cost of goods sold (2,000 units x $65) Gross margin Sales commissions (10% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (2,000 units x $1.00) Net income $250,000 (130,000) 120,000 (25, 000) (30,000) (20,000) (24,000) (2,000) $ 19,000 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 Joel will earn if sales increase by 10 percent.

Explanation / Answer

1)

B)Magnitude of operating leverage =contribution margin /net operating income

     = 93000/19000

       = 4.89

c)% increase in net income = 10*4.89 = 48.90%

Amount of net income =existing net income [1+% increase in net income]

                 = 19000[1+.489] = $ 28291      [approx to 28300[]

Contribution margin Income statement sales 250000 less:Variable expense Cost of goods sold 130000 sales commissions 25000 shipping and handling expense 2000 Total variable expense (157000) contribution margin 93000 Fixed expense Administrative salaries expense 30000 Advertising expense 20000 Depreciation expense 24000 Total fixed cost (74000) net operating income 19000

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