Nagano Company, a merchandising firm, reported the following operating results:
Income Statements
Sales revenue (2,400 units × $100).....................................$ 240,000
Cost of goods sold (2,400 units × $65).................................(156,000)
Gross margin..................................................................84,000
Sales commissions (10% of sales revenue) ..............................(24,000)
Administrative salaries expense..........................................(15,000)
Advertising expense........................................................(20,000)
Depreciation expense.......................................................(10,600)
Shipping and handling expense (2,400 units × $1)......................(2,400)
Net income.................................................................$ 12,000
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 that Nagano will earn if sales revenue increases by 10 percent.