Question

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Percent of Sales 100% 40% Amount $ 132,000 52,800 79,200 16,000 $ 63,200 Sales Variable expenses Contribution margin Fixed expenses Net operating income 60% 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 26% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 26% 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 leverage

Answer 1

1. Degree of operating leverage =Contribution margin /Net operating income = 79,200/63,200

= 1.25

2. Net operating income increases by 32.5%

(1.25*26)

3.

Sales	166,320	100%
Variable expenses	66,528	40%
Contribution margin	99,792	60%
Fixed Expenses	16,000
Net operating income	83,792