The following income statement applies to Kawai Company for the current year:
Income Statement
Sales revenue (200 units × $60).................................................$12,000
Variable cost (200 units × $36)....................................................(7,200)
Contribution margin..................................................................4,800
Fixed costs..........................................................................(1,600)
Net income.........................................................................$ 3,200
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 Kawai Company will earn if it experiences a 10 percent increase in revenue. The sales price per unit is not affected.
c. Verify your answer to Requirement b by constructing an income statement based on a 10 percent increase in sales revenue. The sales price is not affected. Calculate the percentage change in net income for the two income statements.