Question

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Percent of Sales 100% 408 603 Amount $ 135,000 54,000 81,000 15,000 $ 66,000 Sales Variable expenses Contribution margin Fixed expenses Net operating income 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.

Answer 1

1) Degree of operating leverage = Contribution margin/Net income = 81000/66000 = 1.23

2) Net income increase by = (16*1.23) = 19.68%

3) Contribution margin income statement

	Amount	Percent of sales
Sales (135000*1.16)	156600	100%
Variable cost	62640	40%
Contribution margin	93960	60%
Fixed expense	15000
Net income	78960