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		18,000
Net operating income	$	60,600

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 23% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 23% increase in sales.

What is the company’s degree of operating leverage? (Round your answer to 2 decimal places.)

Degree of operating leverage

Using the degree of operating leverage, estimate the impact on net operating income of a 23% increase in sales. (Round your intermediate calculations to 2 decimal places. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).)

Net operating income

by

%

Construct a new contribution format income statement for the company assuming a 23% increase in sales.

Engberg Company
Contribution Income Statement
	Amount	Percent of Sales
			%
			%
			%

Answer 1

1. Degree of Operating Leverage = Contribution Margin / Net Operating Income
= $78600 / $60600 = 1.30

2. Net Operating Income will increase by 23 x 1.30 = 29.9%

3.

	Amount		Percent
Sales	$    1,61,130.00	=131000*1.23	100.00%
Variable expenses	$        64,452.00	=52400*1.23	40.00%
Contribution margin	$        96,678.00		60.00%
Fixed expenses	$        18,000.00
Net operating income	$        78,678.00