The following income statement applies to Walton Company for the current year:
Income Statement
Sales revenue (520 units x $42) $21,840
Variable cost (520 units x $27) (14,040)
Contribution margin 7,800
Fixed cost (5,200)
Net income $2,600
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 Walton Company
will earn if it experiences a 20 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 20 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.
