Question

The CVP income statements shown below are available for Armstrong Company and Contador Company. Armstrong Co. Contador Co. Sales $500,000 $500,000 Variable costs 230,000 49,000 Contribution margin 270,000 451,000 Fixed costs 159,000 340,000 Net income $111,000 $111,000 (a) Compute the degree of operating leverage for each company. (Round answers to 3 decimal places, e.g. 1.150.) Degree of Operating Leverage Armstrong Contador (b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company. Armstrong Company Contador Company $ $ $ $

Answer 1

• [a]

	Contribution margin	Net Income	Degree of Operating Leverage
	[A]	[B]	[C = A/B]
Armstrong Company	$270,000	$111,000	2.432	Answer
Contador Company	$451,000	$111,000	4.063	Answer

• [b]

	Armstrong Company	Contador Company
Sales Revenue	$550,000	$550,000
Variable Costs	$253,000	$53,900
Contribution margin	$297,000	$496,100
Fixed Cost	$159,000	$340,000
Net Income (Loss)	$138,000	$156,100