Question

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 18% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 18% increase in sales.

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 Amount $ 143.000 57,200 85,800 21,000 $ 64,800 Percent of Sales 1008 400 606 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 18% Increase in sales. 3. Construct a new contribution format income statement for the company assuming a 18% Increase in sales. 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 loverage Required 1 Required 2 >

Answer 1

The companies degree of operating leverage would be computed as follows = Contribution Margine / Net operating income = $85800/$64800 = 1.32 Times Using the degree of operating leverage, the estimated impact on net operating income of a 18% increase in sales. = Degree of operating leverage * Percent increase in sales = 1.32 * 18% = 23.76% Net operating income increased by 23.76% 3) New contribution format income statement. Assuming 18% increase in sales Enberg Company Contribution Income statement Amount Percent of Sales Sales ($143000 * 118%) $168,740 100 % Variable Expenses $67,496 40% % Contribution Margine $101,244 60% % Fixed Expenses $21,000 Net operating income $80,244