Engberg Company installs lawn sod in home yards. The company\'s most recent mont

Question

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income 150,000 60,000 90,000 16,000 74,000 100% 408 60% 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 13% increase in sales. 3. Construct a new contribution format income staterment for the company assuming a 13% increase in sales. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Using the degree of operating leverage, estimate the impact on net operating income of a 13% 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).)

Explanation / Answer

1) Enberg co.

1) Degree of Operating Leverage DOL = Contribution Margin / Net income DOL = $90,000/$74,000 1.22 2) Degree of Operating Leverage Estimated percent increase in net operating income = DOL x Increase in sales Estimated percent increase in net operating income = 1.22 x 13% 15.81% 3) Amount Sales ($150,000 x 1.13) $169,500.00 Variable expenses ($60,000 x 1.13) $67,800.00 Contribution margin $101,700.00 Fixed expenses $16,000.00 Net operating income $85,700.00 Original Net Income $74,000.00 Percent change in net operating income = ($85700-74000)/74000 15.81%

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