Question

The CVP income statements shown below are available for Armstrong Company and Contador Company. Armstrong Co. Contador Co. Sales $495,000 $495,000 Variable costs 235,000 48,000 Contribution margin 260,000 447,000 Fixed costs 160,000 347,000 Net income $100,000 $100,000 (a1) Compute the degree of operating leverage for each company. (Round answers to 2 decimal places, e.g. 1.15.) Degree of Operating Leverage Armstrong Contador (b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company.

Answer 1

a. Degree of Operating Leverage = Contribution Margin / Net Income

Armstrong Company = 260,000 / 100,000 = 2.6

Contador Company = 447,000 / 100,000 = 4.47

b. Armstrong Contador

Sales revenue 544,500 544,500

Variable costs 258,500 52,800

Contribution margin 286,000 491,700

Fixed Costs 160,000 347,000

Net Income $126,000 $144,700

Calculation of Sales revenue increase by 10%

495,000 * 1.10 = 544,500

235,000 * 1.10 = 258,500

48,000 * 1.10 = 52,800