Exercise 11-15 Using contribution margin format income statement to measure the
ID: 2582193 • Letter: E
Question
Exercise 11-15 Using contribution margin format income statement to measure the magnitude of operating leverage LO 11-3, 11-4
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 "Operating leverage" to 2 decimal places and round "Net income" answer to nearest whole dollar.)
RUNDLE COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (6,500 units × $161) $ 1,046,500 Cost of goods sold (6,500 units × $87) (565,500 ) Gross margin 481,000 Sales commissions (5% of sales) (52,325 ) Administrative salaries expense (81,000 ) Advertising expense (33,000 ) Depreciation expense (44,000 ) Shipping and handling expenses (6,500 units × $2) (13,000 ) Net income $ 257,675Explanation / Answer
Sales revenue 1046500 Less: Variable costs Cost of goods sold 565500 Sales commissions 52325 Shipping and handling expenses 13000 Total Variable costs 630825 Contribution margin 415675 Less: Fixed costs Administrative salaries expense 81000 Advertising expense 33000 Depreciation expense 44000 Total Fixed costs 158000 Net income 257675 2 Operating leverage = Contribution margin/Net income = 415675/257675= 1.61 3 Percentage change in Net income = 1.61*20%=32.2% Net income =257675*132.2%= 340646 If operating leverage is not rounded off Net income will be $340810
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