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 $ 140,000 56,000 84,000 16,000 $ 68,000 Percent of Sales 100% 40% tex 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 25% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 25% 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 Recured Required 2 >

Answer 1

1. Degree of operating leverage = 1.24

Degree of operating leverage = contribution / Net operating income = 84,000/68,000 = 1.24

2. Net operating income increased by 31.00%

If sale is increased by 25%, impact on operating income = Degree of operating leverage * % increase in sale = 1.24 * 25% = 31.00%

3.

New contribution format income statement if sales increased by 25%:

	Amount	Percent of sales
Sales	$        175,000	100%
Variable expenses	$          70,000	40%
Contribution margin	$        105,000	60%
Fixed expenses	$          16,000
Net operating income	$          89,000