Using a contribution margin format income statement to measure the magnitude of operating leverage
The following income statement was drawn from the records of Bechem Company, a merchandising firm.
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BECHEM COMPANY
Income Statement
For the Year Ended December 31, 2008
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Sales revenue (3,500 units x $123)
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$430,500
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Cost of goods sold (3,500 units x $68)
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(238,000)
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Gross margin
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192,500
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Sales commissions (10% of sales)
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(43,050)
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Administrative salaries expense
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(61,500)
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Advertising expense
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(22,000)
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Depreciation expense
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(25,000)
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Shipping and handling expenses (3,500 units x $4.00)
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(14,000)
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Net income
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$ 26,950
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Required
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 Bechem will earn if sales increase by 10 percent.