Question

1. Beyond Grass installs artificial turf in homes or sporting fields. The company’s most recent monthly contribution format income statement is as follows:

Amount               % Sales

                Sales                                                             $80,000                 100

                Variable Costs                                                $32,000               40

                Contribution Margin                                       $48,000                 60

                Fixed Costs                                                    $38,000

                Net Operating Income                                   $10,000

               

                Required:

1. Compute the company’s degree of operating leverage.

2. By what % would net operating income increase if sales increased by 5%?

Answer 1

1. Degree of operating leverage =( Contribution margin/net operating income) x 100

Contribution margin = 48,000

Net operating income = 10,000

Degree of operating leverage = 48,000/10,000

Degree of operating leverage = 4.80.

2. If sales increases by 5%, then variable costs will also increases by same percentage.

Sales = 80,000 + ( 80,000 x 5%)

Sales = 84,000

Variable cost = 32,000 + ( 32,000 x 5%)

Variable cost = 33,600.

Contribution margin = 84,000 - 33,600

Contribution margin = 50,400

Net operating income = 50,400 - 38,000

Net operating income = $ 12,400.

Percentage change in operating income = (12,400 - 10,000)/10,000 x 100

Percentage change in operating income = (2,400/10,000) x 100

Percentage change in operating income = 24%.

SUMMARY:

1. Degree of operating leverage = 4.80

2. Percentage change in operating income = 24%.