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

ADAMS COMPANY

Income Statement

For the Year Ended December $31,$ Year $1$

Sales revenue $(6,500$ units $\backslash$times $$167)$ $$1,085,500$

Cost of goods sold $(6,500$ units $\backslash$times $$86)(559,000)$

Gross margin $526,500$

Sales commissions $(10\%$ of sales$)(108,550)$

Administrative salaries expense $(80,000)$

Advertising expense $(31,000)$

Depreciation expense $(48,000)$

Shipping and handling expenses $(6,500$ units $\backslash$times $$3)(19,500)$

Net income $$239,450$

Required

Reconstruct the income statement using the contribution margin format.

Calculate the magnitude of operating leverage.

Use the measure of operating leverage to determine the amount of net income Adams will earn if sales increase by $20$ percent.