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

WALTON COMPANY
Income Statement
For the Year Ended December 31, Year 1
Sales revenue (7,500 units $165)	$1,237,500
Cost of goods sold (7,500 units $87)	(652,500)
Gross margin	585,000
Sales commissions (5% of sales)	(61,875)
Administrative salaries expense	(89,000)
Advertising expense	(31,000)
Depreciation expense	(41,000)
Shipping and handling expenses (7,500 units $2)	(15,000)
Net income	$347,125

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 Walton will earn if sales increase by 20 percent.