Question

Che 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 $ 80,000 32,000 48,000 38,000 $ 10,000 Percent of Sales 100% 40% 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 5% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 5% increase in sales. Complete this question by entering your answers in the tabs below.

Answer 1

Required 1 Degree of operating leverage = Contribution margin / Net operating income =48000/10000 4.80 Therefore,company's degree of operating leverage would be 4.80 Required 2 Estimated percent increase in net operating income = (Degree of operating leverage x Estimated percent increase in sales) x 100 = (4.80 x 5%) x 100 24.00% Therefore, company's net operating income would increase by 24% with increase of 5% in sales. Required 3 The new contribution margin statement Amount Sales Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income $ $ $ $ $ 84,000 33,600 50,400 38,000 12,400 Percentage of sales 100% (80000*105%) 40% ( 84000*40%) 60%