Question

Europa Publications, Inc. specializes in reference books that keep abreast of the rapidly changing political and economic issues in Europe. The results of the company’s operations during the prior year are given in the following table. All units produced during the year were sold. (Ignore income taxes.)

Sales revenue	$	1,200,000
Manufacturing costs:
Fixed		283,000
Variable		616,000
Selling costs:
Fixed		24,000
Variable		54,000
Administrative costs:
Fixed		64,000
Variable		19,000

Required:

1-a. Prepare a traditional income statement for the company.

1-b. Prepare a contribution income statement for the company.

2. What is the firm’s operating leverage for the sales volume generated during the prior year?

3. Suppose sales revenue increases by 12 percent. What will be the percentage increase in net income?

4. Which income statement would an operating manager use to answer requirement (3)?

Req. 1A

	EUROPA PUBLICATIONS, INC. Income Statement For the Year Ended December 31, 20XX $0 Operating expenses: 0 $0

Req. 1B

	EUROPA PUBLICATIONS, INC. Income Statement For the Year Ended December 31, 20XX Variable expenses: 0 $0 Fixed expenses: 0 $0

Req. 2

What is the firm’s operating leverage for the sales volume generated during the prior year? (Round your answer to 2 decimal places.)

	Operating leverage

Req. 3

Suppose sales revenue increases by 12 percent. What will be the percentage increase in net income? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

	Percentage increase in net income %

Req. 4

Which income statement would an operating manager use to answer requirement (3)?

	Contribution income statement Traditional income statement

Answer 1

1a

Traditional income statement

Sales	1,200,000
Cost of goods sold
Fixed	- 283,000
Variable	- 616,000
Gross profit	301,000
Operating expenses:
Variable administrative costs	- 19,000
Fixed administrative costs	- 64,000
Variable selling costs	- 54,000
Fixed selling costs	- 24,000
Net operating income	140,000

1b

contribution income statement

Sales revenue	1,200,000
Variable costs:
Manufacturing	- 616,000
Administrative	- 19,000
Selling	- 54,000
Contribution margin	511,000
Fixed costs:
Manufacturing	- 283,000
Administrative	- 64,000
Selling	- 24,000
Net operating income	140,000

2.

Operating leverage = Contribution margin/Operating income

= 511,000/140,000

= 3.65

3.

Operating leverage = % change in operating income/% change in sales

3.65 = % increase in operating income/12%

% increase in operating income = 3.65 x 12

= 43.8%

4.

Contribution income statement would be used by the operating manager to find out operating leverage.