Question

The following income statement was drawn from the records of Joel Company, a merchandising firm:

JOEL COMPANY
Income Statement
For the Year Ended December 31, 2018
Sales revenue (2,000 units × $125)	$	250,000
Cost of goods sold (2,000 units × $65)		(130,000	)
Gross margin		120,000
Sales commissions (10% of sales)		(25,000	)
Administrative salaries expense		(30,000	)
Advertising expense		(20,000	)
Depreciation expense		(24,000	)
Shipping and handling expenses (2,000 units × $1.00)		(2,000	)
Net income	$	19,000

Required

1. Reconstruct the income statement using the contribution margin format.

2. Calculate the magnitude of operating leverage.

3. Use the measure of operating leverage to determine the amount of net income Joel will earn if sales increase by 10 percent.

Complete this question by entering your answers in the tabs below.

• Required A
• Req B and C

Reconstruct the income statement using the contribution margin format.

	JOEL COMPANY Income Statement For the Year Ended December 31, 2018 Less: Variable costs $0 Less: Fixed costs $0

Calculate the magnitude of operating leverage. Use the measure of operating leverage to determine the amount of net income Joel will earn if sales increase by 10 percent. (Round "Operating leverage" to 2 decimal places.)

	b. Operating leverage    times c. Net income

Answer 1

a.

JOEL COMPANY
Income Statement
For the Year Ended December 31, 2018
Sales revenue (2,000 units × $125)	250,000
Less: Variable costs
Cost of goods sold (2,000 units × $65)	-130,000
Sales commissions (10% of sales)	-25,000
Shipping and handling expenses (2,000 units × $1.00)	-2,000
Total variable costs	-157,000
Contribution margin	$93,000
Less: Fixed costs
Administrative salaries expense	-30,000
Advertising expense	-20,000
Depreciation expense	-24,000
Total fixed costs	-74,000
Net income	$19,000

b.

Operating leverage = Contribution margin/ Net income

= 93,000/19,000

= 4.89

c.

Increase in income = Increase in sales x Operating leverage

= 10% x 4.89

= 48.9%

Increase in income = 19,000 x 48.9%

= 9,291

Net income after increase in sales by 10% = 19,000 + 9,291

= $28,291

b. Operating leverage 4.89 times c. Net income $28,291

Kindly comment if you need further assistance.

Thanks‼!