Engberg Company installs lawn sod in home yards. The company’s most recent month

Question

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

1. Compute the company’s degree of operating leverage. (Round your answer to 2 decimal places.)

2. Using the degree of operating leverage, estimate the impact on net operating income of a 16% increase in sales. (Round your intermediate calculations to 2 decimal places. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).)

Net Operating Income ________ by _________%.

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

Amount Percent of Sales Sales $127,000 100% Variable Expenses $50,800 40% Contribution Margin $76,200 60% Fixed Expenses $22,000 Net operating income $54,200

Explanation / Answer

1) Degree of operating leverage = 76200/54200 = 1.41

2) Impact on net operating income = .16*1.41 = 22.56%

3) Contribution format income statement :

Sales 147320 Variable cost -58928 Contribution margin 88392 Fixed expense -22000 Net income 66392

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