Exercise 11-15A (Algo) Using contribution margin format income statement to measure the magnitude of operating leverage LO 11-3, 11-4

The following income statement was drawn from the records of Vernon Company, a merchandising firm:

VERNON COMPANY
Income Statement
For the Year Ended December 31, Year 1
Sales revenue (8,000 units $170)	$1,360,000
Cost of goods sold (8,000 units $84)	(672,000)
Gross margin	688,000
Sales commissions (5% of sales)	(68,000)
Administrative salaries expense	(84,000)
Advertising expense	(38,000)
Depreciation expense	(41,000)
Shipping and handling expenses (8,000 units $5)	(40,000)
Net income	$417,000

Required

Reconstruct the income statement using the contribution margin format.

Calculate the magnitude of operating leverage.

Use the measure of operating leverage to determine the amount of net income Vernon will earn if sales increase by 20 percent.