Europa Publications, Inc. specializes in reference honks that keep abreast of the rapidly changing political and economic issues in Europe. The results of the company’s operations during the prior year are given in the following table. All units produced during the year were sold. (Ignore income taxes.)

Sales revenue .........................$2,000,000

Manufacturing costs:

Fixed ............................ 500,000

Variable ........................... 1,000,000

Selling costs

Fixed ............................ 50,000

Variable ........................... 100,000

Administrative costs:

Fixed ............................ 120,000

Variable .............................. 30,000

Required:

1. Prepare a traditional income statement and a contribution income statement for the company.

2. What is the firm’s operating leverage for the sales volume generated during the prior year?

3. Suppose sales revenue increases by 10 percent. What will be the percentage increase in net income?

4. Which income statement would an operating manager use to answer requirement (3)? Why?