The following income statement applies to Gentect Company for the current year: Sales revenue (450 units × $80) Cost of goods sold (450 units × $40) Contribution margin Fixed costs Net income Income Statement $36,000 (18,000) 18,000 (3,000) $15,000 Required a. Use the contribution margin approach to calculate the magnitude of operating leverage. b. Use the operating leverage measure computed in Requirement a to determine the amount of net income that Gentect Company will earn if it experiences a 20 percent increase in revenue. The sales price per unit is not affected. c. Verify your answer to Requirement b by constructing an income statement based on a 20 percent increase in sales revenue. The sales price is not affected. Calculate the percentage change in net income for the two income statements.
The following income statement applies to Gentect Company for the current year: Sales revenue (450 units × $80) Cost of goods sold (450 units × $40) Contribution margin Fixed costs Net income Income Statement $36,000 (18,000) 18,000 (3,000) $15,000 Required a. Use the contribution margin approach to calculate the magnitude of operating leverage. b. Use the operating leverage measure computed in Requirement a to determine the amount of net income that Gentect Company will earn if it experiences a 20 percent increase in revenue. The sales price per unit is not affected. c. Verify your answer to Requirement b by constructing an income statement based on a 20 percent increase in sales revenue. The sales price is not affected. Calculate the percentage change in net income for the two income statements.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The following income statement applies to Gentect Company for the current year:
Sales revenue (450 units × $80)
Cost of goods sold (450 units × $40)
Contribution margin
Fixed costs
Net income
Income Statement
$36,000
(18,000)
18,000
(3,000)
$15,000
Required
a. Use the contribution margin approach to calculate the magnitude of operating leverage.
b. Use the operating leverage measure computed in Requirement a to determine the amount of net income that
Gentect Company will earn if it experiences a 20 percent increase in revenue. The sales price per unit is not
affected.
c. Verify your answer to Requirement b by constructing an income statement based on a 20 percent increase in
sales revenue. The sales price is not affected. Calculate the percentage change in net income for the two income
statements.
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