Question

The CVP income statements shown below are available for Sheridan Company and Bonita Company.

		Sheridan Co.		Bonita Co.
Sales		$490,000		$490,000
Variable costs		247,000		45,000
Contribution margin		243,000		445,000
Fixed costs		143,000		345,000
Net income		$100,000		$100,000

(a1) Compute the degree of operating leverage for each company. (Round answers to 2 decimal places, e.g. 1.15.)

		Degree of Operating Leverage
Sheridan
Bonita

(b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company.

		Sheridan Company		Bonita Company
Selling ExpensesFixed CostsTotal Variable ExpensesGross ProfitVariable CostsTotal Fixed ExpensesCost of Goods SoldSales RevenueAdministrative ExpensesContribution MarginNet Income/(Loss)		$		$
Sales RevenueSelling ExpensesContribution MarginNet Income/(Loss)Cost of Goods SoldGross ProfitVariable CostsFixed CostsAdministrative ExpensesTotal Fixed ExpensesTotal Variable Expenses
Net Income/(Loss)Cost of Goods SoldVariable CostsAdministrative ExpensesTotal Fixed ExpensesFixed CostsGross ProfitContribution MarginTotal Variable ExpensesSelling ExpensesSales Revenue
Contribution MarginFixed CostsCost of Goods SoldAdministrative ExpensesNet Income/(Loss)Total Fixed ExpensesGross ProfitTotal Variable ExpensesSelling ExpensesSales RevenueVariable Costs
Gross ProfitFixed CostsTotal Fixed ExpensesSales RevenueVariable CostsContribution MarginAdministrative ExpensesSelling ExpensesTotal Variable ExpensesCost of Goods SoldNet Income/(Loss)		$		$

Answer 1

(a) -- Compute the degree of operating leverage for each company.

Answer -

	Particulars	Explanation	Sheridan Co.	Bonita Co.
I.	Contribution margin	Given in question	$243000	$445000
II.	Net income	Given in question	$100000	$100000
Degree of Operation Leverage		I / II	2.43	4.45

.

(b) -- Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company.

Answer -

	Particulars	Explanation	Sheridan Co.	Bonita Co.
I.	Sales	$490000 + 10%	$539000	$539000
II.	Variable costs	($247000 + 10%) AND ($45000 + 10%)	$271700	$49500
III.	Contribution margin	I - II	$267300	$489500
IV.	Fixed costs	Given in question	$143000	$345000
V.	Net income	III - IV	$124300	$144500