The following income statement applies to Baird Company for

The following income statement applies to Baird Company for the current year Income Statement Sales revenue (440 units x $26) Variable cost (440 units x $11) Contribution margirn Fixed cost Net income $11,440 (4,840) 6,600 3,600) $3,eee Requirec 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 Baird Company will earn if it experiences a 15 percent increase in revenue. The sales price per unit is not affected. c-1. Verify your answer to Requirement b by constructing an income statement based on a 15 percent increase in sales revenue. The sales price is not affected c-2. Calculate the percentage change in net income for the two income statements.

Solution

Solution b:

Operating leverage = Contribution margin / Operating income = $6,600 / 3000 = 2.20

Solution b:

If revenue is increase by 15% then net income will increase by = % increase in revenue * Operating leverage = 15% * 2.20 = 33%

Revised net income = Existing net income * 133% = $3,990

Solution c 1:

Solution c2:

% change in net income = ($3,990 - $3,000) / $3,000 = 33%

Annual Income Statements
Particulars	Amount
Sales revenue	$13,156.00
Variable cost	$5,566.00
Contribution margin	$7,590.00
Fixed cost	$3,600.00
Net Income	$3,990.00