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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.
BECHEM COMPANY
Income Statement
For the Year Ended December 31, 2008
Sales revenue (3,500 units x $123)
$430,500
Cost of goods sold (3,500 units x $68)
(238,000)
Gross margin
192,500
Sales commissions (10% of sales)
(43,050)
Administrative salaries expense
(61,500)
Advertising expense
(22,000)
Depreciation expense
(25,000)
Shipping and handling expenses (3,500 units x $4.00)
(14,000)
Net income
$ 26,950
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.
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