The following income statement applies to Lyons Company for the current year:

Required:

a. Use the contribution margin approach to calculate the magnitude of operating leverage.

b. Use the operating leverage measure computed in Requirement a to determine the amount of net income that Lyons Company will earn if it experiences a 20 percent increase in revenue. The sales price per unit is not affected.

c. Verify your answer to Requirement b by constructing an income statement based on a 20 percent increase in sales revenue. The sales price is not affected. Calculate the percentage change in net income for the two income statements.

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Income Statement Sales Revenue (400 units X $25) Variable Cost (400 units X $10) Contribution Margin Fixed Costs Net Income $10,000 (4,000) 6,000 (3,500) $2,500