Calculate the magnitude of operating leverge

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Reference no: EM131263870

The following income statement applies to Stuart Company fo the current year.

Income statement

Sales revenue(400 units x $25) $10000

Variable cost (400 x $10) (4000)

Contribution margin 6000

Fixed costs (3500)

Net income nn $2500

a. Use the contribution margin approach to calculate the magnitude of operating leverge.

b. Use the operating leverage measure computed in Requirement a to determine the amount of net incom that Stuart 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.

Reference no: EM131263870

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