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	$	121,000		100	%
Variable expenses		48,400		40	%
Contribution margin		72,600		60	%
Fixed expenses		19,000
Net operating income	$	53,600

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 17% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 17% increase in sales.

Answer 1