Required . Reconstruct Kent\'s income statement, assuming that it serves 200 cus

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Required . Reconstruct Kent's income statement, assuming that it serves 200 customers when it lures 100 customers away from Trent by lowering the sales price to $150 per customer Reconstruct Trent's income statement, assuming that it serves 200 customers when it lures so customers away from Kent by lowering the sales price to $150 per customer e. Explain why the price-cutting strategy increased Kent Company's profits but caused a net Exercise 2-13A Using contribution margin format income statement to measure the The following income statement was drawn from the records of Butler Company, a merchandis- loss for Trent Company magnitude of operating leverage ing firm: ( VC) CM BUTLER COMPANY ncome Statement For the Year Ended December 31, 2014 Sales revenue 02,000 units × $275) Cost of goods sold (2,000 units × $146) Gross margin Sales commissions (10% of sales) $550,000 (292.000 258,000 (55,000) (80,000) (38,000) 50,000) Shipping and handling expenses (2,000 unitsx $1.50)(3,000) S 32,000 275 1007o Administrative salaries expense Advertising expense Depreciation expense Net income

Explanation / Answer

a) Income statement by the contribution margin format

b) Degree of operating leverage = contribution margin / operating income

= 200000 / 32000

= 6.25

c) percent Increase in net income = operating leverage * increase in sales

= 6.25*10%

= 62.5%

total increase in net income = 32000*0.625

= $20,000

Net income with an increase in sales = 32000+20000

= $52,000

Butler Company Income Statement For the year ended December 31, 2014 Sales revenue $5,50,000 Less: variable expenses COGS $2,92,000 sales commission $55,000 shipping and handling expenses $3,000 Contribution margin $2,00,000 Less: fixed expenses Administrative salaries expenses $80,000 advertising expense $38,000 depreciation expense $50,000 Net profit $32,000

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