Question

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Percent of Sales Amount $146, eee 58,400 100% Sales 40% Variable expenses 60% Contribution margin 87,600 Fixed expenses 24,000 Net operating income $ 63,600 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 27% increase in sales 3. Construct a new contribution format income statement for the company assuming a 27 % increase in sales.

Answer 1

Solution:

1) Degree of Operating Leverage = ( Sales - Variable Cost) / Profits

= ($146,000 - $58,400) / $63,600 = 1.37

2) Net Operating Income is increase by $23,652 ($87,252 - $63,600) and increase by 37.18% in

percentage ($23,652 / $63,600) because of increase in 27% of sales

Particulars	Original	Increase in sales
Sales	$            146,000	$              185,420
Variable Cost	$               58,400	$                74,168
Contribution	$               87,600	$              111,252
Fixed Cost	$               24,000	$                24,000
Net Operating Income	$               63,600	$                87,252
DOL	1.38	1.28

3) New Contribution Income Statement with 27% increase in sales

Engberg Company
Contribution Income Statement
	Amount	Percent of Sales
Sales	$            185,420	100%
Variable Cost	$               74,168	40%
Contribution	$            111,252	60%
Fixed Cost	$               24,000
Net Operating Income	$               87,252