Question

The CVP income statements shown below are available for Armstrong Company and Contador Company. Armstrong Co. Contador Co. Sales $505,000 $505,000 Variable costs 247,000 49,000 Contribution margin 258,000 456,000 Fixed costs 163,000 361,000 Net income $95,000 $95,000 (a) Compute the degree of operating leverage for each company. (Round answers to 3 decimal places, e.g. 1.150.) Degree of Operating Leverage Armstrong Contador (b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company. Armstrong Company Contador Company $ $ $ $ Click if you would like to Show Work for this question: Open Show Work

Answer 1

Explanation:

a. The computation of the operating leverage is shown below:

As we know that

Degree of operating leverage = Contribution margin ÷ Net income

For Armstrong Company, it is

= $258,000 ÷ $95,000

= 2.715

For Contador Company, it is

= $456,000 ÷ $95,000

= 4.80

b. Now the variable costing income statement is

For Armstrong Company

Sales ($505,000 × 110%)                                  $555,500

Less: Variable cost  ($247,000 × 110%)           ($271,700)

Contribution margin                                         $283,800

Less: Fixed cost                                               ($163,000)

Net income                                                      $120,800

For Contador Company

Sales ($505,000 × 110%)                                  $555,500

Less: Variable cost  ($49,000 × 110%)           ($53,900)

Contribution margin                                         $501,600

Less: Fixed cost                                               ($361,000)

Net income                                                      $140,600