Question

Eneliko Company installs home theater systems. The company’s most recent monthly contribution format income statement appears below: Amount Percent of Sales Sales $ 123,000 100% Variable expenses 49,200 40% Contribution margin 73,800 60% Fixed expenses 24,000 Net operating income $ 49,800 Required: 1. Compute the company’s degree of operating leverage. (Round your answer to 2 decimal places.) Degree of operating leverage 2. Using the degree of operating leverage, estimate the impact on net operating income of a 16% increase in sales. (Input the amount as a positive value. Round your intermediate calculations and final answers to 2 decimal places.) Net operating income by % 3. Construct a new contribution format income statement for the company assuming a 16% increase in sales. (Input all amounts as positive values except losses which should be indicated by a minus sign.) Contribution Income Statement Total $ $

Answer 1

1.

Degree of operating leverage = Contribution margin / Net operating income

= $73,800 / $49,800

= 1.48 times

2.

A degree of operating leverage of 1.48 implies that for every 1% increase in sales will result in a 1.48%(1.48*1%) increase in net operating income.

16% increase in sales results in 23.68% (1.48*16%) increase in net operating income.

Net operating income increase by 23.68%.

3.

Contribution format income statement

Sales [$123,000+($123,000*16%)]	$142,680
Variable expenses ($142,680*40%)	$57,072
Contribution margin	$85,608
Fixed expenses	$24,000
Net operating income	$61,608