Question

The following CVP income statements are available for Chantal Corp. and Mantle, Inc.

  Chantal Corp.                     Mantle, Inc.

Sales revenue $700,000                         $700,000

Variable costs     350,000                           210,000

Contribution margin 350,000                           490,000

Fixed costs     225,000                           365,000

Net income   $125,000                         $125,000

Instructions

(a)   Compute the degree of operating leverage for each company.

(b)   Assume that sales revenue decreases by 20%. Prepare a CVP income statement for each company.

Answer 1

Requirement a:

	Chantal Corp	Mantle, Inc.
Contribution margin	$ 350,000	$ 490,000
÷ Net income	$ 125,000	$ 125,000
Degree of Operating leverage	$ 2.80	$ 3.92

Requirement b:

Income statement
	Chantal Corp.	Mantle, Inc.
Sales revenue [$700,000 x 80%]	$ 560,000	$ 560,000
Less: Variable costs [$560,000 x 50%], [$560,000 x 30%]	$ 280,000	$ 168,000
Contribution margin	$ 280,000	$ 392,000
Less: Fixed costs	$ 225,000	$ 365,000
Net income	$ 55,000	$ 27,000