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	$	139,000		100	%
Variable expenses		55,600		40	%
Contribution margin		83,400		60	%
Fixed expenses		18,000
Net operating income	$	65,400

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 11% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 11% increase in sales.

Required 1

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

	Degree of operating leverage

Required 2

Using the degree of operating leverage, estimate the impact on net operating income of a 11% increase in sales. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e 0.1234 should be entered as 12.34).)

Net operating income

by

%

Required 3

Construct a new contribution format income statement for the company assuming a 11% increase in sales.

Engberg Company
Contribution Income Statement
	Amount	Percent of Sales
			%
			%
	0	0	%
	$0

Answer 1

1.degree of operating leverage=contribution margin/net operating income

=(83400/65400)=1.2755229358

=1.28(Approx).

2.degree of operating leverage=change in net operating income/Change in sales

Hence change in net operating income=increase in net operating income=(1.2755229358*11)=14.03%

3.

	Amount	Percent of sales
Sales(139000*1.11)	154290	100%
Variable expenses(55600*1.11)	61716	40%
Contribution margin	$92574	60%
Fixed expenses	18000
net operating income	$74,574.