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

Question

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 × $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 operatingleverage 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

Income Statement a) Sales revenue 250,000 less:Variable expense cost of goods sold -130,000 sales commission -25,000 Shipping and handling expense -2,000 contribution margin 93,000 less:Fixed expense Administrative salaries expense -30,000 advertising expense -20,000 Depreciation expense -24,000 Net income 19,000 b) operating leverage = contribution margin/ net income 93,000/19000 4.89 c) net income 28300

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