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 13% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 13% increase in sales.

Amount Percent of Sales Sales $ 131,000 100 % Variable expenses 52,400 40 % Contribution margin 78,600 60 % Fixed expenses 16,000 Net operating income $ 62,600

Explanation / Answer

1. degree of operating leverage=Contribution/net operating income

=(78600/62600)=1.26(Approx).

2. degree of operating leverage=% change in net operating income/% change in sales

Hence % change in net operating income=increase in net operating income=(1.26*13)=16.32%(Approx)

3.

[Please note that intermediate calculations have not been rounded off].

Sales(131000*1.13) $148030 VC(52400*1.13) $59212 Contribution margin $88818 Fixed expenses $16000 Net operating income $72818

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