Exercise 20-14 The CVP income statements shown below are available for Armstrong

ID: 2525265 • Letter: E

Question

Exercise 20-14 The CVP income statements shown below are available for Armstrong Company and Contador Company. Armstrong Co. Contador Co. Sales $505,000 $505,000 Variable costs 249,000 51,000 Contribution margin 256,000 454,000 Fixed costs 161,000 359,000 Net income $95,000 $95,000 (a) Compute the degree of operating leverage for each company. (Round answers to 3 decimal places, e.g. 1.150.) Degree of Operating Leverage Armstrong Contador (b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company. Armstrong Company Contador Company $ $ $ $

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Exercise 20-14 The CVP income statements shown below are available for Armstrong Company and Contador Company Armst Co. $505,000 249,000 256,000 161,000 595,000 Contador Co. Sales Variable costs Contribution margin Fixed costs Net income $505,000 51,000 454,000 359,000 95,000 (a) Compute the degree of operating leverage for each company. (Round answers to 3 decimal places, e.g. 1.150.) Armstrong Contador (b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company Armstrong CompanyContador Com

Explanation / Answer

Solution:

Part a – Degree of Operating Leverage

Degree of Operating Leverage = Contribution Margin / Net Income

Armstrong = $256,000 / 95,000 = 2.69

Contador = $454,000 / 95,000 = 4.78

Part b – Variable Costing Income Statement

Armstrong Company

Contador Company

Sales Revenue

$555,500

Variable Costs

$273,900

$56,100

Contribution Margin

$281,600

$499,400

Fixed Costs

$161,000

$359,000

Net Income

$120,600

$140,400

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