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 | 17,000 | |||||
| Net operating income | $ | 67,600 | ||||
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 20% increase in sales.
3. Construct a new contribution format income statement for the company assuming a 20% increase in sales.
Requirement 1
Operating leverage = 1.25
Requirement 2
Impact on net income = Increase of net income by 25%.
Requirement 3
| Engberg Company | ||
| Contribution income statement | ||
| Amount | Percent of sales | |
| Sales revenue | $ 169,200.00 | 100% |
| Variable costs | $ 67,680.00 | 40% |
| Contribution margin | $ 101,520.00 | 60% |
| Fixed cost | $ 17,000.00 | |
| Net Operating income | $ 84,520.00 | |
Working
| Degree of operating leverage = Contribution margin /Net operating income | |
| Degree of operating leverage = 84600/67600 | |
| Degree of operating leverage = | 1.25 |
.
We will use another Operating leverage formula for requirement 2
| Operating leverage = Change in operating income / Change in sales | |
| Change in operating income = Operating leverage x Change in sales | |
| Change in operating income = 1.25 x 20% | |
| Change in operating income = | 25.00% |
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income...
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...
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $ 144,000 100 % Variable expenses 57,600 40 % Contribution margin 86,400 60 % Fixed expenses 17,000 Net operating income $ 69,400 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 20% increase in sales. 3. Construct a new contribution...
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...
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