Question

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

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

Homework Answers

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
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