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	$	2,000,000
Manufacturing costs:
Fixed		600,000
Variable		935,000
Selling costs:
Fixed		40,000
Variable		70,000
Administrative costs:
Fixed		80,000
Variable		35,000

Required:

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

2. 1-b. Prepare a contribution income statement for the company.

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

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

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

Answer 1

Ans. 3	Operating leverage    =   Contribution margin / Operating income
	$960,000 / $240,000
	4.00
Ans. 4	Percentage change (increase) in net income = Operating leverage * Increase in revenue
	4.00 * 12%
	48.00%
Ans.   5	Contribuiton format income statement would be used by an operating manager
	because contribution margin can be found on this income statement.