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 Baird, a merchandising firm:

BAIRD COMPANY
Income Statement
For the Year Ended December 31
Sales revenue (5,500 units $162)	$	891,000
Cost of goods sold (5,500 units $81)		(445,500	)
Gross margin		445,500
Sales commissions (10% of sales)		(89,100	)
Administrative salaries expense		(81,000	)
Advertising expense		(34,000	)
Depreciation expense		(49,000	)
Shipping and handling expenses (5,500 units $4)		(22,000	)
Net income	$	170,400

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 Baird will earn if sales increase by 20 percent.