Answer: See explanation
Explanation:
a. Compute the company's degree of operating leverage for 2019.
This will be:
= Contribution / Pre tax income
= 432000 / 108000
= 4
b. If sales decrease by 5% in 2020, what will be the company's pretax income?
We should note that the degree of operating leverage is:
= % change in pre tax income / % change in sales
4 = % change in ore tax Income / 5%
% change in ore tax income = 5% × 4 = 20%
Company's pre-tax income will be:
= 108000 - (20% × 108000)
= 108000 - (0.2 × 108000)
= 108000 - 21600
= $86400
c. Assume sales for 2020 decrease by 5%. Prepare a contribution margin income statement for 2020.
Sales = 2160000 × 95% = 2160000 × 0.95 = 2052000
Less: Variable cost = 1728000 × 95% = 1728000 × 0.95 = 1641600
Contribution margin = 410,000
Less: Fixed cost = 324000
Pre tax net income= 86400
