Sanders Company recorded sales revenues of $10 million for the year just ended. It recorded expenses totaling $9 million. Of these expenses, $4 million were expenses that would not have been different if sales revenue had been different. They were fixed expenses.

a. Prepare a table showing how much net income Sanders would have earned on sales of $8 million, $10 million, and $12 million.

b. Suppose the company’s total expenses had been $9 million, and of that amount, the fixed expenses had been $6 million. The remaining expenses would have varied proportionately with sales revenue. Prepare a table showing how much net income Sanders would have earned on sales of $8 million, $10 million, and $12 million.

c. What conclusions about the effect of operating leverage on net income can you draw from this analysis?