Question:
Assessing the magnitude of operating leverage
The following income statement applies to Cohen Company for the current year.
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Sales revenue (350 units x $25)
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$8,750
|
|
Variable cost (350 units x $10)
|
3,500
|
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Contribution margin Fixed costs
|
5,250 (3,500)
|
|
Net income
|
$1,750
|
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 Cohen Company will earn if it experiences a 10 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 10 percent increase in sales revenue. The sales price is not affected. Calculate the percentage change in net income for the two income statements.