Question

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Amount $ 138,000 55,200 Percent of Sales 100% 40% 60% Sales Variable expenses Contribution margin Fixed expenses Net operating income 82,800 18,000 $ 64,800 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 17% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 17% increase in sales.

Answer 1

Requirement 1

Degree of operating leverage =

1.28

Requirement 2

Net operating income will Increase by 21.76%

Requirement c

Engberg Company
Contribution income statement
	Amount	Percent of sales
Sales revenue	$     1,61,460.00	100%
Variable costs	$         64,584.00	40%
Contribution margin	$         96,876.00	60%
Fixed cost	$         18,000.00
Net Operating income	$         78,876.00

Working

Degree of operating leverage = Contribution margin /Net operating income
Degree of operating leverage = 82800/64800
Degree of operating leverage =	1.28

.There are three formulas for calculation degree of operating leverage, we will use second formula to solve part b

Operating leverage = Change in operating income / Change in sales
Change in operating income = Operating leverage x Change in sales
Change in operating income = 1.28 x 17%
Change in operating income =	21.76%