The following income statement was drawn from the records of Stuart Company, a merchandising firm: STUART COMPANY Income Statement For the Year Ended December 31, Year 1 $1,352,000 Sales revenue (8,000 units x $169) Cost of goods sold (8,000 units x $88) Gross margin Sales commissions (5% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (8,000 units x $5) Net income Required (704,000) 648,000 (67,600) (90,000) (32,000) (46,000) (40,000) $372,400 a. Reconstruct the income statement using the contribution margin format. b. Calculate the magnitude of operating leverage. c. Use the measure of operating leverage to determine the amount of net income Stuart will earn if sales increase by 20 percent.

Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
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Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
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Chapter15: Financial Statement Analysis
Section: Chapter Questions
Problem 38E: Sundahl Companys income statements for the past 2 years are as follows: Refer to the information for...
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The following income statement was drawn from the records of Stuart Company, a merchandising firm:
STUART COMPANY
Income Statement
For the Year Ended December 31, Year 1
$1,352,000
Sales revenue (8,000 units x $169)
Cost of goods sold (8,000 units x $88)
Gross margin
Sales commissions (5% of sales)
Administrative salaries expense
Advertising expense
Depreciation expense
Shipping and handling expenses (8,000 units x $5)
Net income
Required
(704,000)
648,000
(67,600)
(90,000)
(32,000)
(46,000)
(40,000)
$372,400
a. Reconstruct the income statement using the contribution margin format.
b. Calculate the magnitude of operating leverage.
c. Use the measure of operating leverage to determine the amount of net income Stuart will earn if sales increase by 20
percent.
Transcribed Image Text:The following income statement was drawn from the records of Stuart Company, a merchandising firm: STUART COMPANY Income Statement For the Year Ended December 31, Year 1 $1,352,000 Sales revenue (8,000 units x $169) Cost of goods sold (8,000 units x $88) Gross margin Sales commissions (5% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (8,000 units x $5) Net income Required (704,000) 648,000 (67,600) (90,000) (32,000) (46,000) (40,000) $372,400 a. Reconstruct the income statement using the contribution margin format. b. Calculate the magnitude of operating leverage. c. Use the measure of operating leverage to determine the amount of net income Stuart will earn if sales increase by 20 percent.
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