Question

The following income statement was drawn from the records of Stuart Company, a merchandising firm: STUART COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (4,500 units × $169) $ 760,500 Cost of goods sold (4,500 units × $88) (396,000 ) Gross margin 364,500 Sales commissions (10% of sales) (76,050 ) Administrative salaries expense (89,000 ) Advertising expense (39,000 ) Depreciation expense (48,000 ) Shipping and handling expenses (4,500 units × $4) (18,000 ) Net income $ 94,450 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 Stuart will earn if sales increase by 20 percent.

Answer 1

Income Statement
For the Year Ended December 31, 2018
Sales revenue	760500
Less: Variable costs
Cost of goods sold	(396000)
Sales commissions	(76050)
Shipping and handling expenses	(18000)
Contribution margin	270450
Less: Fixed costs
Administrative salaries	(89000)
Advertising expense	(39000)
Depreciation expense	(48000)
Net income	94450
2
Operating leverage = Contribution margin/Net income
Operating leverage = 270450/94450= 2.86
3
Net income increase = 2.86*20%= 57.2%
Net income = 94450+(94450*57.2%)= $148475
Net income will be $148540 if not rounded off