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:

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 15% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 15% increase in sales

Amount Percent of Sales Sales $ 131,000 100 % Variable expenses 52,400 40 % Contribution margin 78,600 60 % Fixed expenses 22,000 Net operating income $ 56,600 Complete this question by entering your answers in the tabs below Required 1Required 2 Required 3 What is the company's degree of operating leverage? (Round your answer to 2 decimal places.) Degree of operating leverage

Explanation / Answer

1) Degree of Operating Leverage = Contribution Margin/Net Operating Income

= $78,600/$56,600 = 1.39

2) Degree of Operating Leverage = % Change in Net Operating Income/%Change in Sales

1.39 = % Change in Net Operating Income/15%

  % Change in Net Operating Income = 1.39*15% = 20.85%

Therefore net operating income will increase by 20.85%, if sales increase by 15%.

3) Engberg Company

Contribution Income Statement (Amounts in $)

Amount Percent of Sales Sales (131,000*1.15) 150,650 100% Variable expenses (150,650*40%) (60,260) 40% Contribution margin 90,390 60% Fixed expenses (22,000) Net operating income 68,390

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.