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) $ 250,000 Cost of goods sold (2,000 units × $65) (130,000 ) Gross margin 120,000 Sales commissions (10% of sales) (25,000 ) Administrative salaries expense (30,000 ) Advertising expense (20,000 ) Depreciation expense (24,000 ) Shipping and handling expenses (2,000 units × $1.00) (2,000 ) Net income $ 19,000 Required Reconstruct the income statement using the contribution margin format. Calculate the magnitude of operating leverage. Use the measure of operating leverage to determine the amount of net income Joel will earn if sales increase by 10 percent.

Answer 1

Answer:

(I)

$\left[\begin{array}{cc}Sales&250,000\\Variable \: Cost&-157,000\\Contribution \: Margin&93,000\\Admin \: expense&-30,000\\adv \: expense&-20,000\\depreciation \: expense&-24,000\\Net \: Income&19,000\\\end{array}\right]$

(II)

Net income will be of 28,300 if sales increase by 10%

Explanation:

(I)

Variable cost:

65 unit cost

+12.5 sales commision (125 x 10%)

+1 shipping and handling epxneses

78.5 total variable cost

78.5 x 2000 = 157,000 variable cost

(II)

$\frac{ContributionMargin}{Profit} = Operating Leverage$

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

250,000 - 157,000 = 93,000

93,000/19,000 = 4.894736842 = 4.895

10% increase in revenue will ncrease the net income by 148.95%

19,000 x 148.95% = 28300.05