The following budgeted income statement applies to Johnson Company: Income Statement Sales revenue (1,000 units $89)...............................$ 89,000 Variable cost (1,000 units $50).................................(50,000) Contribution margin .................................................39,000 Fixed costs..........................................................(26,000) Net income.........................................................$ 13,000 Required a. Use the Contribution margin approach to calculate the magnitude of operating leverage. b. Use the operating leverage measure computed in Requirement a to determine the amount

The following budgeted income statement applies to Johnson Company:

Income Statement

Sales revenue (1,000 units × $89)...............................$ 89,000

Variable cost (1,000 units × $50).................................(50,000)

Contribution margin.................................................39,000

Fixed costs..........................................................(26,000)

Net income.........................................................$ 13,000

Required

a. Use the Contribution margin approach to calculate the magnitude of operating leverage.

b. Use the operating leverage measure computed in Requirement a to determine the amount of net income that Johnson Company will earn if sales volume increases by 10 percent. Assume the sales price per unit remains unchanged at $89.

c. Verify your answer to Requirement b by constructing an alternative income statement based on a 10 percent increase in sales volume. The sales price per unit remains unchanged at $89. Calculate the percentage change in net income for the two income statements.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...