Question

The following income statement was drawn from the records of Rundle Company, a merchandising firm: RUNDLE COMPANY Incone Statement Sales revenue (4,500 units $169) cost of goods sold (4,500 units x $84) Gross margin Sales commissions (58 of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (4,500 units $2) $ 760,500 (378,000) 382,500 (38,025) (89,000) (31,000) (46,000) (9,000) s 169,475 Required a. Reconstruct the income statement using the contribution margin format. b. Calculate the magnitude of operating leverage c. Use the measure of operating leverage to determine the amount of net income Rundle 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 RUNDLE COMPANY

Answer 1

a. Income statement :

Sales	$760,500
Less : Variable costs
Cost of goods sold	( $378,000 )
Sales commission	( $38,025 )
Shipping and handling expenses	( $9,000 )
Contribution margin	$335,475
Less : Fixed costs
Administrative salaries expenses	( $89,000 )
Advertising expenses	( $31,000 )
Depreciation expenses	( $46,000 )
Net income	$169,475

b. Operating leverage = Contribution margin / Net income = $335,475 / $169,475 = 1.98

c. Let us calculate the amount of net income that will be earned if the sales increases by 10%

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

1.98 = % change in net income / 10%

% change in net income = 10% * 1.98 = 19.8%

Thus, if the sales increase by 10%, the net income will increase by 19.8%

So here, the Net income = Current net income * ( 100% + % increase ) = $169,475 * ( 100% + 19.8% ) = $203,031.05