Exercise 6-14 The CVP income statements shown below are available for Armstrong
ID: 2412206 • Letter: E
Question
Exercise 6-14 The CVP income statements shown below are available for Armstrong Company and Contador Company Armstrong Co Contador Co. Sales Variable costs Contribution margin Fixed costs Net income $492,000 250,000 242,000 156,000 $86,000 $492,000 50,000 442,000 356,000 $86,000 (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 CompanyExplanation / Answer
a) Degree of operating leverage = Contribution margin/Operating income
Armstrong company = 242000/86000 = 2.814
Contador company = 442000/86000 = 5.139
b) Contribution margin income statement :
Armstrong company Contador company Sales 492000*1.1 = 541200 541200 Variable cost -275000 -55000 Contribution margin 266200 486200 Fixed cost -156000 -356000 Net income 110200 130200