Question

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Percent of Sales 100% 40% Amount $ 135,000 54,000 81,000 22,000 $ 59,000 Sales Variable expenses Contribution margin Fixed expenses Net operating income 60% 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 19% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 19% increase in sales.

Answer 1

1.

Degree of operating leverage = Contribution margin/Net operating income

= 81,000/59,000

= 1.372881356

2.

Increase in net operating income = Increase in sales x Degree of operating leverage

= 19 x 1.372881356

= 26.08%

3.

Contribution format income statement

Sales	160,650	100%
Variable expense	64,260	40%`
Contribution margin	96,390	60%
Fixed expense	22,000
Net operating income	74,390

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