The following income statement was drawn from the records of Franklin Company, a merchandising firm:

The following income statement was drawn from the records of Franklin Company, a merchandising firm:

FRANKLIN COMPANY
Income Statement
For the Year Ended December 31, Year 1
Sales revenue (6,500 units × $164)	$	1,066,000
Cost of goods sold (6,500 units × $87)		(565,500	)
Gross margin		500,500
Sales commissions (10% of sales)		(106,600	)
Administrative salaries expense		(84,000	)
Advertising expense		(36,000	)
Depreciation expense		(45,000	)
Shipping and handling expenses (6,500 units × $2)		(13,000	)
Net income	$	215,900

Required

1. Reconstruct the income statement using the contribution margin format.
   
2. Calculate the magnitude of operating leverage.
3. Use the measure of operating leverage to determine the amount of net income Franklin will earn if sales increase by 20 percent.
   
   
   
   Explanation
   a.
   Sales Revenue (6,500 units × $164) = $1,066,000
   Cost of goods sold (6,500 units × $87) = (565,500)
   Sales commissions (10% of Sales) = (106,600)
   Shipping and handling expenses (6,500 units × $2) = (13,000)
   
   b.

   Operating leverage =	Contribution margin
   	Net income

   
   

   Operating leverage =	$380,900	= 1.76 Times
   	$215,900

   
   c.
   A 20 percent increase in sales revenue will produce a 35.2 percent increase in net income (i.e., 20 percent × 1.76 = 35.2 percent). Accordingly, net income would increase to $291,897 [i.e., $215,900 + ($215,900 × 0.352)].
   
   

Thanks