Question

Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $ 131,000 100 % Variable expenses 52,400 40 % Contribution margin 78,600 60 % Fixed expenses 24,000 Net operating income $ 54,600 Required: 1. What is the company’s degree of operating leverage? 2. Using the degree of operating leverage, estimate the impact on net operating income of a 13% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 13% increase in sales.

Answer 1

1. Degree of operating leverage calculation.

Degree of operating leverage = Contribution Margin / Net Operating Income

= $78600 / $54600

= 1.44

2. If the sale is increase by 13% than the net operating income will be increase by :

= Percentage increase in sales * Degree of operating leverage

= 13% * 1.44

= 18.72%

3. New Contribution Statement

New Contribution Income Statement
	Total	Sales Percentage
Sales ($131000 + 13%)	$148,030	100%
Variable Expenses ($148030 * 0.40)	$59,212	40%
Contribution Margin ($148,030 - $59,212)	$88,818	60%
Fixed Expenses	$24,000	-
Net Operating Income ($88,818 - $24,000)	$64,818	-