Question

The following income statement applies to Kawai Company for the current year: Income Statement Sales revenue (200 units × $60) $ 12,000 Variable cost (200 units × $36) (7,200 ) Contribution margin 4,800 Fixed cost (1,600 ) Net income $ 3,200 Required 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 Kawai Company will earn if it experiences a 10 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 10 percent increase in sales revenue. The sales price is not affected. c-2. Calculate the percentage change in net income for the two income statements.

Answer 1

Answer:

a. Use the contribution margin approach to calculate the magnitude of operating leverage.

operating leverage = contribution margin / net income = $4,800 / $3,200 = 1.5

b. Use the operating leverage measure computed in Requirement a to determine the amount of net income that Kawai Company will earn if it experiences a 10 percent increase in revenue. The sales price per unit is not affected.

if sales increase by 10%, net income will increase by 10% x 1.5 = 15%

a 15% increase in net income = $3,200 x 15% = $480

c-1. Verify your answer to Requirement b by constructing an income statement based on a 10 percent increase in sales revenue. The sales price is not affected.

Sales revenue $13,200

Variable costs ($7,920)

Contribution margin $5,280

Fixed costs ($1,600)

Net income $3,680

c-2. Calculate the percentage change in net income for the two income statements.

% change = [($3,680 - $3,200) / $3,200] x 100 = 15% increase