Question

Use the operating leverage measure computed in Requirement a to determine the amount of net income that Kawai Company will earn if it experiences a 10 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 10 percent increase in sales revenue. The sales price is not affected c-2.

Answer 1

To determine the amount of net income, use the operating leverage measure to calculate the new net income based on a 10 percent increase in revenue without affecting sales price. This can be done by dividing the contribution margin by the operating income and multiplying the current revenue by 1.10 to get the new revenue.

Step-by-step explanation:

To determine the amount of net income that Kawai Company will earn if it experiences a 10 percent increase in revenue without affecting the sales price per unit, we can use the operating leverage measure. Operating leverage measures the impact of fixed costs on a company's operating income. It is calculated by dividing the contribution margin by the operating income.

Here is the step-by-step calculation:

1. Calculate the current operating leverage measure using the formula: Operating Leverage = Contribution Margin / Operating Income.
2. Next, determine the new revenue amount by multiplying the current revenue by 1.10 (to account for a 10% increase).
3. Finally, calculate the new net income by multiplying the new revenue by the operating leverage measure.
   

By following these steps, you can determine the amount of net income that Kawai Company will earn if it experiences a 10 percent increase in revenue.