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

Question

The following income statement was drawn from the records of Campbell Company, a merchandising firm: CAMPBELL COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (6,500 units × $168) $ 1,092,000 Cost of goods sold (6,500 units × $82) (533,000 ) Gross margin 559,000 Sales commissions (10% of sales) (109,200 ) Administrative salaries expense (85,000 ) Advertising expense (35,000 ) Depreciation expense (48,000 ) Shipping and handling expenses (6,500 units × $2) (13,000 ) Net income $ 268,800 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 Campbell will earn if sales increase by 10 percent.

Explanation / Answer

Contribution margin format Sales revenue 1,092,000 less:Variable expense cost of goods sold 533,000 Sales commission 109,200 shipping and handling expense 13,000 655,200 Contribution margin 436,800 less:Fixed expense Administrative salaries expense 85,000 Advertising expense 35,000 Depreciation expense 48,000 168,000 Net income 268,800 operating leverage = contribution/net income 436,800/268,800 1.625 amount of net income percentage increase = 10%*1.625 16.25 % 43680 increase in net income if sales increase by 10% total net income = 268,800+43,680 312,480 answer

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