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Hi, can someone please help me out with this problem? thanks in advance.

Construct Income Statement(s) for a firm with an accounting break-even point of $1,000,000 and a degree of operating leverage of 3. Assume a corporate income tax rate of 10%. Show calculations that prove that the accounting break-even point is $1,000,000 and the DOL is 3 for your statement(s).

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Answer:

The following is an income statement using the Contribution format.

...........................Income Statement for Rivieremia Corp................................

Sales ........................................................................$1,500,000

Less Variable Costs................................................($1,200,000)

Contribution Margin..............................................$300,000

Less Fixed Costs....................................................($200,000)

Operating Income .................................................$100,000

Less Tax....................................................................($10,000)

Net Income...............................................................$90,000

Tax = 10% * 100,000 = $10,000

Proving breakeven is $1,000,000.

The breakeven point for a company can be calculated by dividing the Fixed cost by the contribution margin ratio.

Contribution margin ratio = Contribution margin / Sales

= 300,000/1,500,000

= 20%

= Fixed Cost/ Contribution Margin ratio

= 200,000/20%

= $1,000,000

Degree of Operating Leverage = Contribution Margin/ Operating Income

= 300,000/100,000

= 3

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