Europa Publications, Inc. specializes in reference books that keep abreast of the rapidly changing political and...
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Accounting
Europa Publications, Inc. specializes in reference books thatkeep abreast of the rapidly changing political and economic issuesin Europe. The results of the company’s operations during the prioryear are given in the following table. All units produced duringthe year were sold. (Ignore income taxes.)
Sales revenue
$
1,200,000
Manufacturing costs:
Fixed
283,000
Variable
616,000
Selling costs:
Fixed
24,000
Variable
54,000
Administrative costs:
Fixed
64,000
Variable
19,000
Required:
1-a. Prepare a traditional income statement forthe company.
1-b. Prepare a contribution income statementfor the company.
2. What is the firm’s operating leverage forthe sales volume generated during the prior year?
3. Suppose sales revenue increases by 12percent. What will be the percentage increase in net income?
4. Which income statement would an operatingmanager use to answer requirement (3)?
Req. 1A
EUROPA PUBLICATIONS, INC.
Income Statement
For the Year Ended December 31, 20XX
$0
Operating expenses:
0
$0
Req. 1B
EUROPA PUBLICATIONS, INC.
Income Statement
For the Year Ended December 31, 20XX
Variable expenses:
0
$0
Fixed expenses:
0
$0
Req. 2
What is the firm’s operating leverage for the sales volumegenerated during the prior year? (Round your answer to 2 decimalplaces.)
Operating leverage
Req. 3
Suppose sales revenue increases by 12 percent. What will be thepercentage increase in net income? (Do not round intermediatecalculations. Round your answer to 1 decimal place.)
Percentage increase in net income
%
Req. 4
Which income statement would an operating manager use to answerrequirement (3)?
Contribution income statement
Traditional income statement
Europa Publications, Inc. specializes in reference books thatkeep abreast of the rapidly changing political and economic issuesin Europe. The results of the company’s operations during the prioryear are given in the following table. All units produced duringthe year were sold. (Ignore income taxes.)
Sales revenue | $ | 1,200,000 | |
Manufacturing costs: | |||
Fixed | 283,000 | ||
Variable | 616,000 | ||
Selling costs: | |||
Fixed | 24,000 | ||
Variable | 54,000 | ||
Administrative costs: | |||
Fixed | 64,000 | ||
Variable | 19,000 | ||
Required:
1-a. Prepare a traditional income statement forthe company.
1-b. Prepare a contribution income statementfor the company.
2. What is the firm’s operating leverage forthe sales volume generated during the prior year?
3. Suppose sales revenue increases by 12percent. What will be the percentage increase in net income?
4. Which income statement would an operatingmanager use to answer requirement (3)?
Req. 1A
| ||||||||||||||||||||||||||||||||||
Req. 1B
| |||||||||||||||||||||||||||||||||||||||||||||||||
Req. 2
What is the firm’s operating leverage for the sales volumegenerated during the prior year? (Round your answer to 2 decimalplaces.)
|
Req. 3
Suppose sales revenue increases by 12 percent. What will be thepercentage increase in net income? (Do not round intermediatecalculations. Round your answer to 1 decimal place.)
|
Req. 4
Which income statement would an operating manager use to answerrequirement (3)?
|
Answer & Explanation Solved by verified expert
1a
Traditional income statement
| Sales | 1,200,000 |
| Cost of goods sold | |
| Fixed | - 283,000 |
| Variable | - 616,000 |
| Gross profit | 301,000 |
| Operating expenses: | |
| Variable administrative costs | - 19,000 |
| Fixed administrative costs | - 64,000 |
| Variable selling costs | - 54,000 |
| Fixed selling costs | - 24,000 |
| Net operating income | 140,000 |
1b
contribution income statement
| Sales revenue | 1,200,000 |
| Variable costs: | |
| Manufacturing | - 616,000 |
| Administrative | - 19,000 |
| Selling | - 54,000 |
| Contribution margin | 511,000 |
| Fixed costs: | |
| Manufacturing | - 283,000 |
| Administrative | - 64,000 |
| Selling | - 24,000 |
| Net operating income | 140,000 |
2.
Operating leverage = Contribution margin/Operating income
= 511,000/140,000
= 3.65
3.
Operating leverage = % change in operating income/% change in sales
3.65 = % increase in operating income/12%
% increase in operating income = 3.65 x 12
= 43.8%
4.
Contribution income statement would be used by the operating manager to find out operating leverage.
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