The following income statement was drawn from the records of Mantooth Company, a merchandising firm.

Required:

a. Reconstruct the income statement using the contribution margin format.

b. Calculate the magnitude of operating leverage.

c. Use the measure of operating leverage to determine the amount of net income Mantooth will earn if sales increase by 10 percent.

Transcribed Image Text:

MANTOOTH COMPANY Income Statement For the Year Ended December 31, 2006 Sales Revenue (3,500 units X $120) Cost of Goods Sold (3,500 units X $64) Sales Commissions (10% of sales) Gross Margin Administrative Salaries Expense Advertising Expense Depreciation Expense Shipping and Handling Expenses (3,500 units X $4.00) Net Income $420,000 (224,000) 196,000 (42,000) (60,000) (20,000) (25,000) (14,000) $ 35,000