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 Anunt $ 143,000 57,200 8 5,800 19,000 $ 66,800 Percent of Sales 1001 408 603 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 16% Increase in sales. 3. Construct a new contribution format income statement for the company assuming a 16% Increase in sales. ances 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

1	Computation of degree of operating leverage:
	Operating leverage	=	Contribution margin / Net operating Income
		=	$85800 / $66800
		=	1.28
2	Computation of effect on Net operating income when sales increase by 25%:
	Sales increased by	=	16%
	Impact on Net operating Income	=	Operating leverage X Percentage of sales increased
		=	1.28 X 16%
		=	20.48%
	Therefore, Net operating income increased by 20.48%
3
	Engberg Company
	Contribution format Income Statement			Percent of sales
	Sales ($143000 X 116%)		$                     1,65,880	100%
	Variable expenses ($165880 X 40%)		$                        66,352	40%
	Contribution margin		$                        99,528	60%
	Fixed expense		$                        19,000
	Net operating Income		$                        80,528

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