Question

Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO6-8]

Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:

	Amount			Percent of Sales
Sales	$	143,000		100	%
Variable expenses		57,200		40	%
Contribution margin		85,800		60	%
Fixed expenses		18,000
Net operating income	$	67,800

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 27% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 27% increase in sales.

Complete this question by entering your answers in the tabs below.

• Required 1

• Required 2
• Required 3

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

Degree of operating leverage

1.27

Using the degree of operating leverage, estimate the impact on net operating income of a 27% 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

Increase or decrease

by

…..

%

Construct a new contribution format income statement for the company assuming a 27% increase in sales.

Engberg Company
Contribution Income Statement
	Amount	Percent of Sales
Sales			%
Variable expenses			%
Contribution margin		60	%
Fixed expenses	18,000
Net operating income

Answer 1

a) Degree of operating leverage = Contribution margin/Net operating income = 85800/67800 = 1.27

b) Net income increase by = 85800/67800*27 = 34.17%

c) Contribution margin income statement

Engberg Company
Contribution Income Statement
	Amount	Percent of Sales
Sales	143000*1.27 = 181610	100	%
Variable expenses	57200*1.27 = 72644	40	%
Contribution margin	108966	60	%
Fixed expenses	18,000
Net operating income	90966