Question

Exercise 6-9 Compute and Use the Degree of Operating Leverage (LO6-8] 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 Amount $ 134,000 53,600 80,400 22,000 $ 58,400 Percent of Sales 100% 40% 604 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 21% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 21% Increase in sales. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the company's degree of operating leverage? (Round your answer to 2 decimal places.) Degree of operating leverage Required 2 >

Answer 1

Required 1 Degree of Operating Leverage = Degree of Operating Leverage = Contribution Margin Operating Income $ 80,400 $ 58,400 1.38 Degree of Operating Leverage = Requirement 2 Degree of Operating Leverage = 1.38 = %Change in Operating Income %Change in Sales %Change in Operating Income 21% 28.98% %Change in Operating Income

Requirement 3 Contribution Income Statement Amount Percent of Sales Sales $ 1,62,140 100% ($134,000 + 21%) Variable Expenses $ 64,856 40% ($162,140 * 40%) Contribution Margin $ 97,284 60% Fixed Expenses 22,000 Net Operating Income $ 75,284