Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $ 132,000 100 % Variable expenses 52,800 40 % Contribution margin 79,200 60 % Fixed expenses 17,000 Net operating income $ 62,200 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 15% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 15% increase in sales.
What is the company’s degree of operating leverage? (Round your answer to 2 decimal places.)
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a) computing degree of operating leverage
Degree of operating leverage = contribution/EBIT(net operating income)
Given contribution=$79200 , EBIT(NET OPERATING INCOME) = $62200
DEGREE OF OPERATING LEVERAGE= $79200/$62200 = 1.273
b) if sales increase by 15% then net impact on net operating income (EBIT)
DEGREE OF OPERATING LEVERAGE = percentage change in EBIT /PERCENTAGE CHANGE IN SALE
1.273= PERCENTAGE CHANGE IN EBIT / 15
PERCENTAGE CHANGE EBIT = 15 × 1.273 = 19.09%
c)construct new format for income statement if sales increase by 15 percentage and also calculate New degree of operating leverage
If sales increase by 15% then there will be proportional increase in variable expenses
Therefore new income statement
| Particular | amount ($) |
| Sales | 151800 |
| (-) variable expenses | (60720) |
| Contribution | 91080 |
| (-) fixed expenses | (17000) |
| Net operating income | $74080 |
NEW DEGREE OF OPERATING LEVERAGE = $91080/$74080= 1.23
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