Question

The following income statement was drawn from the records of Thornton Company, a merchandising firm:

THORNTON COMPANY
Income Statement
For the Year Ended December 31, 2018
Sales revenue (4,000 units × $162)	$	648,000
Cost of goods sold (4,000 units × $80)		(320,000	)
Gross margin		328,000
Sales commissions (10% of sales)		(64,800	)
Administrative salaries expense		(88,000	)
Advertising expense		(34,000	)
Depreciation expense		(47,000	)
Shipping and handling expenses (4,000 units × $1)		(4,000	)
Net income	$	90,200

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 Thornton will earn if sales increase by 20 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.

THORNTON COMPANY
Income Statement
For the Year Ended December 31, 2018
Less: Variable costs
Less: Fixed costs

Calculate the magnitude of operating leverage. Use the measure of operating leverage to determine the amount of net income Thornton will earn if sales increase by 20 percent. (Round intermediate and "Operating leverage" answer to 2 decimal places.)

b.	Operating leverage		times
c.	Net income

Answer 1

1	Contribution income statement		Per unit
	Sales revenue	648000	162
	Variable expense
	Cost of goods sold	320000	80
	Sales commission	64800	16.2
	Shipping and handling expense	4000	1
	Total variable expense	388800	97.2
	Contribution margin	259200	64.8
	Fixed expense
	Administrative salaries expense	88000
	Advertising expense	34000
	Depreciation expense	47000
	Total fixed expense	169000
	Net income	90200
2	Operating leverage = Contribution margin / net income
	Contribution margin	259200
	Net income	90200
	Operating leverage	2.87	Times
3	Contribution margin / 2.87 = Net income
	Net income	162564	(466560/2.87)
	Net sales	777600
	Variable expense	311040
	Contribution margin	466560