Required Reconstruct Kents income statement assuming that i

Required . Reconstruct Kent\'s income statement, assuming that it serves 200 customers when it lures 100 customers away from Trent by lowering the sales price to $150 per customer Reconstruct Trent\'s income statement, assuming that it serves 200 customers when it lures so customers away from Kent by lowering the sales price to $150 per customer e. Explain why the price-cutting strategy increased Kent Company\'s profits but caused a net Exercise 2-13A Using contribution margin format income statement to measure the The following income statement was drawn from the records of Butler Company, a merchandis- loss for Trent Company magnitude of operating leverage ing firm: ( VC) CM BUTLER COMPANY ncome Statement For the Year Ended December 31, 2014 Sales revenue 02,000 units × $275) Cost of goods sold (2,000 units × $146) Gross margin Sales commissions (10% of sales) $550,000 (292.000 258,000 (55,000) (80,000) (38,000) 50,000) Shipping and handling expenses (2,000 unitsx $1.50)(3,000) S 32,000 275 1007o Administrative salaries expense Advertising expense Depreciation expense Net income

Solution

a) Income statement by the contribution margin format

b) Degree of operating leverage = contribution margin / operating income

= 200000 / 32000

= 6.25

c) percent Increase in net income = operating leverage * increase in sales

= 6.25*10%

= 62.5%

total increase in net income = 32000*0.625

= $20,000

Net income with an increase in sales = 32000+20000

= $52,000

Butler Company
Income Statement
For the year ended December 31, 2014
Sales revenue	$5,50,000
Less: variable expenses
COGS	$2,92,000
sales commission	$55,000
shipping and handling expenses	$3,000
Contribution margin	$2,00,000
Less: fixed expenses
Administrative salaries expenses	$80,000
advertising expense	$38,000
depreciation expense	$50,000
Net profit	$32,000