Question
In: Accounting
The following income statement was drawn from the records of Rundle Company, a merchandising firm: RUNDLE...
The following income statement was drawn from the records of Rundle Company, a merchandising firm:
| RUNDLE COMPANY | |||
| Income Statement | |||
| For the Year Ended December 31, 2018 | |||
| Sales revenue (7,000 units × $163) | $ | 1,141,000 | |
| Cost of goods sold (7,000 units × $84) | (588,000 | ) | |
| Gross margin | 553,000 | ||
| Sales commissions (10% of sales) | (114,100 | ) | |
| Administrative salaries expense | (80,000 | ) | |
| Advertising expense | (38,000 | ) | |
| Depreciation expense | (47,000 | ) | |
| Shipping and handling expenses (7,000 units × $2) | (14,000 | ) | |
| Net income | $ | 259,900 | |
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 intermediate and "Operating leverage" answer to 2 decimal places.)
|
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Solutions
Expert Solution
|
RUNDLE COMPANY |
|
|
Income Statement |
|
|
For the Year Ended December 31, 2018 |
|
|
Sales Revenue |
$1,141,000.00 |
|
Less: Variable costs |
|
|
Variable Sales Commission |
$ 114,100.00 |
|
variable Shipping and handling expenses |
$ 14,000.00 |
|
Direct Variable cost |
$ 588,000.00 |
|
Total variable Cost` |
$ 716,100.00 |
|
Contribution Margin |
$ 424,900.00 |
|
Less: Fixed cost |
|
|
Administrative salaries expense |
$ 80,000.00 |
|
Advertising Expense |
$ 38,000.00 |
|
Depreciation expense |
$ 47,000.00 |
|
Total Fixed cost |
$ 165,000.00 |
|
Net Income |
$ 259,900.00 |
|
Degree of Operating Leverage |
= |
Contribution Margin/Net Operating income |
|
Degree of Operating Leverage |
= |
(424900/259900) |
|
Degree of Operating Leverage |
= |
1.63 times |
|
Calculating Change in net income with the help of operating Leverage |
||
|
(A).. .Sales Increase |
20% |
|
|
(B) …Degree of Operating Leverage |
1.63 |
|
|
(AxB)… Increase in Operating Income |
32.70% |
|
Degree of Operating leverage is also calculated as =change in % of net income/Change in sales
If we want to find % change in Income we can just multiply operating leverage with % change in sales.
Notes
Cost of goods sold is considered as variable cost.
ekkarill92 answered 1 year agoRelated Solutions
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