Question

Europa Publications, Inc. specializes in reference books that keep abreast of the rapidly changing political and economic issues in Europe. The results of the company’s operations during the prior year are given in the following table. All units produced during the year were sold. (Ignore income taxes.)

Sales revenue	$	1,750,000
Manufacturing costs:
Fixed		572,000
Variable		818,000
Selling costs:
Fixed		35,000
Variable		65,000
Administrative costs:
Fixed		75,000
Variable		30,000

Required:

1. 1-a. Prepare a traditional income statement for the company.

2. 1-b. Prepare a contribution income statement for the company.

3. 2. What is the firm’s operating leverage for the sales volume generated during the prior year?

4. 3. Suppose sales revenue increases by 14 percent. What will be the percentage increase in net income?

5. 4. Which income statement would an operating manager use to answer requirement (3)?

Answer 1

Requirement 1
Traditional Income Statement
Revenue		1750000
Less: Operating Expeneses
Fixed Costs	572000
Variable Costs	818000	1390000
Operating Income		360000
Administrative Expenses	105000
Selling Costs	100000	205000
Net Income		155000

Requirement 1a
Revenue		1750000
Less:Variable Costs
Manufacturing Expenses	818000
Administrative Expenses	30000
Selling Costs	65000	913000
Contribution Margin		837000
Less: Fixed Costs
Manufacturing Expenses	572000
Administrative Expenses	75000
Selling Costs	35000	682000
Net Income		155000

Operating leverage=	Contribution Margin/Net income
=	837000/155000
=	5.4

Requirement 3
			Sales increased by 14%
Revenue		1750000		1995000
Less:Variable Costs
Manufacturing Expenses	818000		932520
Administrative Expenses	30000		34200
Selling Costs	65000	913000	74100	1040820
Contribution Margin		837000		954180
Less: Fixed Costs
Manufacturing Expenses	572000		572000
Administrative Expenses	75000		75000
Selling Costs	35000	682000	35000	682000
Net Income		155000		272180

% increase in net income =	Incremental income/Net income
=	(272180-155000)/155000
=	75.6	%

Requirement 4 -Contribution Margin Statement is used to arrive at the answers of requirement 3