Problem: Module 5 Textbook Problem 6 Learning Objectives: 5-5 Prepare an income statement using the contribution margin approach 5-6 Calculate the magnitude of operating leverage The following income statement was drawn from the records of Franklin, a merchandising firm: FRANKLIN COMPANY Income Statement For the Year Ended December 31 Sales revenue (7,000 units $162) $ 1,134,000 Cost of goods sold (7,000 units $84) (588,000 ) Gross margin 546,000 Sales commissions (5% of sales) (56,700 ) Administrative salaries expense (88,000 ) Advertising expense (30,000 ) Depreciation expense (41,000 ) Shipping and handling expenses (7,000 units $3) (21,000 ) Net income $ 309,300 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 Franklin will earn if sales increase by 10 percent.