Question 1 The CVP income statements shown below are available for Armstrong Com

Question

Question 1 The CVP income statements shown below are available for Armstrong Company and Contador Company. Armstrong Co. Contador Co. Sales Variable costs Contribution margin Fixed costs Net income $495,000 233,000 262,000 160,000 $102,000 $495,000 48,000 447,000 345,000 $102,000 (a) Compute the degree of operating leverage for each company. (Round answers to 3 decimal places, e.g. 1.150.) Degree of Operating Leverage Armstrong Contador (b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company. Armstrong Company Contador Company

Explanation / Answer

Degree of operating leverage = Contribution / EBIT

Armstrong = 262000 / 102000 = 2.57

Contador = 447000 / 102000 = 4.38

Armstrong Contador Sales 544500 544500 Less: Variable costs 256300 52800 Contribution margin 288200 491700 Fixed costs 160000 345000 Net income 128200 146700

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