History Bookmarks Window Help Connect Exercise 2-14A Assessing the magnitude of

Question

History Bookmarks Window Help Connect Exercise 2-14A Assessing the magnitude of operating leverage LO2-4 The following income statement applies to Gibson Company for the current year Income Sta Sales revesoe (480 units $32) $15.360 variable cost (48o units$17(8 160) rixed cost 3,000 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 Gibson Company wil earn if it experiences a 15 percent increase in revenue. The sales price per unit is not affected c-1. verify your answer to Requirement b by constructing an income statement based on a ts percent increase in sales revenue he sales price is not affected c-2. Calculate the percentage change in net income for the two income statements Complete this question by entering your answers in the tabs below. Use the contribution margin approach to calculate the magnitude of operating leverage. Afterwards, use the operating leverage measure previousty computed for Requirement A to determine the amount of net income that Gibson Company wil earn if it experiences a 15 percent increase in revenue. The sales price per unit is not afected. tDa not round intermediate 8 MacBook Air 30888 ,4 ??FS ho

Explanation / Answer

Solution-A: Operating leverage is a method to measure the degree to which a firm incurs a combination of fixed and variable costs. Operating Levelerage is calcuated by dividing Contribution Margin by Net Operating Income.

Magnitude of Operating Leverage= 7200/3000= 240% = 2.4. It means that 10% increase in revenue will lead to 10%*2.4= 24% increase in Operating Income.

Solution-B: 15% increase in revenue will lead to 15*2.4= 36% increase in Operating Income. New Operating Income would be 3000plus36%= 3000*136%= 4080.

Colution- C1: Income statement for 552 units (480* 1.15):

Sale Price (552*32)= 17664

Less: Variable cost (552*17)= 9384

Contribution= 8280

Less: Fixed cost= 4200

Net Income= 4080

Solution- C2: Income difference= 400-3000= 1080

% change in income= 1080/3000*100= 36%

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