Question

Exercise 7-28 Publishing; Contribution Income Statement (LO 7-7, 7-8)

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	$	1,400,000
Manufacturing costs:
Fixed		417,000
Variable		626,000
Selling costs:
Fixed		28,000
Variable		58,000
Administrative costs:
Fixed		68,000
Variable		23,000

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 14 percent. What will be the percentage increase in net income?
4. Which income statement would an operating manager use to answer requirement 3?

Answer 1

Traditional Income Statement
Sales revenue			14,00,000
Less: Cost of goods sold (417000+626000)	10,43,000
Gross Profit			3,57,000
Operating expense
Selling expenses
Variable			58000
Fixed			28000
Total selling expense			86000
Admin expense
Variable			23000
Fixed			68000
Total admin expense			91000
Net Income			180000
Contribution margin income statement
Sales revenue			1400000
Less: Variable cost
Mfg cost			626000
Selling expense		58000
Admin expense		23000
Total Variable cost			707000
Contribution margin		693000
Less: Fixed cost
Mfg cost			417000
Selling expense		28000
Admin expense		68000
Total Fixed cost			513000
Net Income			180000
Operating leverage:
Contribution		693000
Divide: Income net		180000
Operating leverage:		3.85
% increase in Sales		14%
Multiply: Operating leverage	3.85
% increase in income		53.90%
Contribution margin income statement
Sales revenue	(1400000+14%)		1596000
Less: Variable cost
Mfg cost		(626000+14%)	713640
Selling expense	(58000+14%)	66120
Admin expense	(23000+14%)	26220
Total Variable cost				805980
Contribution margin			790020
Less: Fixed cost
Mfg cost				417000
Selling expense			28000
Admin expense			68000
Total Fixed cost				513000
Net Income				277020
Net increase in Income = 277020-180000 = 97020
% increase in income = 97020/180000*100 = 53.90%