Question

Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:

	Amount			Percent of Sales
Sales	$	141,000		100	%
Variable expenses		56,400		40	%
Contribution margin		84,600		60	%
Fixed expenses		22,000
Net operating income	$	62,600

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 25% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 25% increase in sales.

Answer 1

1. Degree of operating leverage = Contribution margin/Net operating income = 84600/62600 = 1.3514 2. Sales = 141000 X 125% = 176250 Variable expense = 176250 X 40% = 70500 Contribution margin = Sales - Variable expense = 176250 - 70500 = 105750 Degree of operating leverage = Contribution margin/Net operating income 1.3514 = 105750/ Net operating income Net operating income = 78252 Impact: Net operating income will increase by $15,652(78252-62600).

176,2501 70,500 Percent of Sales 100 % L 40% Amount Sales Variable expenses Contributi on margin Fixed expenses Net operating $ income 105,750 60% 22,000 83,750 Please give as many likes for the hard work.