Question

Exercise 19-14 The CVP income statements shown below are available for Armstrong Company and Contador Company. Armstrong Co. Contador Co. Sales $499,000 $499,000 Variable costs 242,000 46,000 Contribution margin 257,000 453,000 Fixed costs 159,000 355,000 Net income $98,000 $98,000 (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 $ $ $ $

Answer 1

Explanation:

a. The presentation of given question is shown below: -

Degree of operating leverage = Contribution margin ÷ Net income

Armstrong Company

= $257,000 ÷ $98,000

= 2.62 2

Contador Company

= $453,000 ÷ $98,000

= 4.622

b. Income statement of Variable costing is  

Armstrong Company

Sales ($499,000 × 110%)                                  $548,900

Less: Variable cost  

($242,000 × 110%)                                           ($266,200)

Contribution margin                                         $282,700

Less: Fixed cost                                               ($159,000)

Net income                                                       $132,700

Contador Company

Sales

($499,000 × 110%)                                          $548,900

Less: Variable cost

($46,000 × 110%)                                             ($50,600)

Contribution margin                                        $498,300

Less: Fixed cost                                               ($355,000)

Net income                                                      $143,300