The following income statement was drawn from the records of Rundle Company, a m
ID: 2335828 • Letter: T
Question
The following income statement was drawn from the records of Rundle Company, a merchandising firm:
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 Rundle will earn if sales increase by 20 percent.
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 Rundle will earn if sales increase by 20 percent. (Round intermediate and "Operating leverage" answer to 2 decimal places.)
RUNDLE COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (7,000 units × $163) $ 1,141,000 Cost of goods sold (7,000 units × $84) (588,000 ) Gross margin 553,000 Sales commissions (10% of sales) (114,100 ) Administrative salaries expense (80,000 ) Advertising expense (38,000 ) Depreciation expense (47,000 ) Shipping and handling expenses (7,000 units × $2) (14,000 ) Net income $ 259,900Explanation / Answer
RUNDLE COMPANY
Income Statement
For the Year Ended December 31, 2018
Sales Revenue
$1,141,000.00
Less: Variable costs
Variable Sales Commission
$ 114,100.00
variable Shipping and handling expenses
$ 14,000.00
Direct Variable cost
$ 588,000.00
Total variable Cost`
$ 716,100.00
Contribution Margin
$ 424,900.00
Less: Fixed cost
Administrative salaries expense
$ 80,000.00
Advertising Expense
$ 38,000.00
Depreciation expense
$ 47,000.00
Total Fixed cost
$ 165,000.00
Net Income
$ 259,900.00
Degree of Operating Leverage
=
Contribution Margin/Net Operating income
Degree of Operating Leverage
=
(424900/259900)
Degree of Operating Leverage
=
1.63 times
Calculating Change in net income with the help of operating Leverage
(A).. .Sales Increase
20%
(B) …Degree of Operating Leverage
1.63
(AxB)… Increase in Operating Income
32.70%
Degree of Operating leverage is also calculated as =change in % of net income/Change in sales
If we want to find % change in Income we can just multiply operating leverage with % change in sales.
Notes
Cost of goods sold is considered as variable cost.
RUNDLE COMPANY
Income Statement
For the Year Ended December 31, 2018
Sales Revenue
$1,141,000.00
Less: Variable costs
Variable Sales Commission
$ 114,100.00
variable Shipping and handling expenses
$ 14,000.00
Direct Variable cost
$ 588,000.00
Total variable Cost`
$ 716,100.00
Contribution Margin
$ 424,900.00
Less: Fixed cost
Administrative salaries expense
$ 80,000.00
Advertising Expense
$ 38,000.00
Depreciation expense
$ 47,000.00
Total Fixed cost
$ 165,000.00
Net Income
$ 259,900.00
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.