11 HOMEWORK Saved The following income statement was drawn from the records of F

Question

11 HOMEWORK Saved The following income statement was drawn from the records of Fanning Company, a merchandising firm: FANNING COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (5,500 units $163) Cost of goods sold (5,500 units $89) Gross margin sales comissions (5% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (5,500 units x $3) Net income 896,500 489,5001 407,000 (44,825) (88, 000) (35,000) (40,000 (16,500) S 182,675 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 Fanning will earn if sales increase by 20 percent. Complete this question by entering your answers in the tabs below. Req A Req B and C Calculate the magnitude of operating leverage. Use the measure of operating leverage to determine the amount of net income Fanning will earn if sales increase by 20 percent. (Round "Operating leverage" to 2 decimal places and round "Net income" answer to nearest whole dollar.) b. Operating leverage C. Net income 1.89 times

Explanation / Answer

Req A

Fanning Company

Income Statement

For the year ended as on December 31 2018

Sale = $ 896,500

Less : Variable Cost

Cost of goods sold = ($ 489,500)

Sales Commission = ($ 44,825)

Shipping and handling expense = ($ 16,500)

Contribution Margin = $ 345,675

Less: Fixed Cost

Administrative Salaries expense = ($ 88,000)

Advertising Expense = ($ 35,000)

Depreciation = ($ 40,000)

   Net Income = $182,675

Req B.

Operating Leverage = Contribution Margin / Net income

=  $ 345,675 / $ 182,675

= 1.89 times

Req.C

Net Income when sales increase by 20% = 120% of contribution margin - total fixed cost

= $ 414,810 - $ 163,000

= $ 251,810

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