Question

C w ricwOC UTC wey cepeidiny Leverage (LOV-8) 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 $ 147,000 58,800 88,200 15,800 $ 73,200 Percent of Sales 100% 40% 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 19% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 19% 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 < Prev 9 of 12 !!! Next >

Answer 1

1) Degree of operating leverage = Contribution margin / Net operating income Contribution margin Net operating income Degree of operating leverage $88,200 $73,200 1.20 ($88200 / $73200] 2) Percentage increase in net operating income = Percentage increase in sales x Degree of operating leverage Percentage increase in sales Degree of operating leverage Percentage increase in net operating income 19% 1.2049 [Ref: Part-1, if not rounded off] 22.89% [19% x 1.2049] 3) Engberg Company Contribution Income Statement Amount % of Sale Sales $174,930 100.00% [Sales = $147000 x 119% = $174930] Variable expenses $69,972 40.00% [Variable expenses = $58800 x 119% = $69972] Contribution margin $104,958 60.00% [Contribution margin = $174930 - $69972 = $104958] Fixed expenses $15,000 Net operating income $89,958