Question

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 $ 131,000 52,400 78,600 23,000 $ 55,600 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 17% increase in unit sales. 3. Construct a new contribution format income statement for the company assuming a 17% increase in unit 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 < Required 1 Required 2 >

Answer 1

1. Degree of operating leverage

= Contribution margin/Net operating income

= 78,600/55,600

= 1.41

2. Change in net operating income

= Change on sales * Degree of operating leverage

= 17% increase * 1.41

Net operating income INCREASES by 23.97%

3.

	Amount	Percent
Sales (131,000+17%)	153,270	100%
Variable cost (52,400+17%)	61,308	40%
Contribution margin	91,962	60%
Fixed cost	23,000
Net operating income	68,962

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