Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:
| Amount | Percent of Sales | |||||
| Sales | $ | 137,000 | 100 | % | ||
| Variable expenses | 54,800 | 40 | % | |||
| Contribution margin | 82,200 | 60 | % | |||
| Fixed expenses | 17,000 | |||||
| Net operating income | $ | 65,200 | ||||
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 12% increase in sales.
3. Construct a new contribution format income statement for the company assuming a 12% increase in sales.
| 1 | |||
| Contribution margin | 82200 | ||
| Divide by Net operating income | 65200 | ||
| Degree of operating leverage | 1.26 | ||
| 2 | |||
| Increase in sales | 12% | ||
| X Degree of operating leverage | 1.26 | ||
| Net operating income increases by | 15.12% | ||
| 3 | |||
| Amount | Percent of Sales | ||
| Sales | 153440 | 100% | =137000*1.12 |
| Variable expenses | 61376 | 40% | =153440*40% |
| Contribution margin | 92064 | 60% | |
| Fixed expenses | 17000 | ||
| Net operating income | 75064 |
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income...
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