Below is a contribution income statement for Fairfax Company. Parcent of Sales 4

Question

Below is a contribution income statement for Fairfax Company. Parcent of Sales 40% 60% Amount Sales Variable expenses Contribution margin Fixed expenses Net operating income 44,000 86,400 20,000- S 66,400 Required 1. Compute the company's degree of operating leverage. (Round your answer to 2 decimal places) declmal places (Le .1234 should be decimal p entered as 12.34),) income ora 26% increase in sales. (Round your intermediate calculations to 2 decimal places. Round your percentage answer to 2 a 2. Using the degree of operating leverage, estimate the impact on net operating 3. Construct a new contribution format income statement for the company assuming a 26% increase in sales

Explanation / Answer

Part -(1) Degree of operating leverage = (Contribution margin/Net operating income) = (86,400/66,400) = 1.30 Part -(2) Estimated percent increase in net operating income   Degree of operating leverage = 1.30 Percentage increase in sales = 26% Estimated percent increase in net operating income = (26%*1.30) = 33.80% Part -(3) Fairfax Company Contribution Income statement Total Sales (144,000*1.26) 181,440 Variable expenses (181,440*40%)     72,576 Contribution margin 108,864 Fixed expenses     20,000 Net operating income     88,864

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