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	$	148,000		100	%
Variable expenses		59,200		40	%
Contribution margin		88,800		60	%
Fixed expenses		22,000
Net operating income	$	66,800

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 16% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 16% increase in sales.

Answer 1

Requirement:

1	Degree of Operating Leverage	1.329	88800/66800	Contribution Margin / Net operating Income
2	Impact on net operating income	21.26%	1.329*16%	Degree of Operating Leverage*Increase in Sales

3) Contribution Format

	Amount	Percent of Sales
Sales [148000*1.16]	$ 171,680	100.00%
Variable Expenses [59200*1.16]	$    68,672	40.00%
Contribution Margin	$ 103,008	60.00%
Fixed Expenses	$    22,000
Net Operating Income	$    81,008