Problem:
Europa Publications, Inc. specializes in reference books that keep abreast of 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.............................................. $ 2,000,000
Manufacturing costs:
Fixed:.........................................................500,000
Variable......................................................1,000,000
Selling costs:
Fixed............................................................50,000
Variable.......................................................100,000
Administrative costs:
Fixed..........................................................120,000
Variable..........................................................30,000
Question 1. Prepare a traditional income statement and a contribution income statement for the company.
Question 2. What is the firm's operating leverage for the sales volume generated during the prior year?
Question 3. Suppose sales revenue increases by 10 percent. What will be the percentage increase in net income?
Question 4. Which income statement would an operating manger use to answer requirement (3)? Why?