Question

Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Sales Percent of Sales 100% 40% 60% Amount $ 128,000 51,200 76,800 22,000 $ 54,800 Variable expenses Contribution margin Fixed expenses Net operating income 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 21% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 21% 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 < Required 1 Required 2 >

Answer 1

Question 1 Degree of Operating Leverage = Contribution Margin Earning before interet and tax (operating income Degree of Operating Leverage = 1.40% 76,800 54,800 Degree of Operating Leverage of 1.401% implies that every 1% increase in sales will result 1.401% increase in Earning berfore interest and tax.

Question 2 Impact on Operating Income of a 21% incrase in sales Amount Percent of sales 154880 100% Sales 128,000 x 21% increase Less: Variables expenses 61952 40% = 60% Contibution margin Fixed cost 92928 22000 Less: = Opertaing income 70928 46% Sales 128,000 x 21% = 26,880 + 128,000 = 154,880 Variable Expenses (40 % of sales) = 154,880 x 40% = 61,952 Operating income % Operating income Sales = 70,928 = 46% 154,880

Question 3 Impact on Operating Income of a 21% incrase in sales 128,000 x 21% increase Sales Variables expenses Amount 154,880 61,952 Percent of sales 100% 40% Less: 60% Contibution margin Fixed cost 92,928 22,000 Less: Opertaing income 70,928 46% Sales 128,000 x 21% = 26,880 + 128,000 = 154,880 Variable Expenses (40 % of sales) = 154,880 x 40% = 61,952 Contribution margin = Contibution margin Sales 61,952 = 60% 154,880

QUESTION - Missing numbers

Question 1

Case #1 Units sold 8,900 Sales Variable expenses Amount 293,700 151,300 Per units Percentage of sales 33 100% 17 52% - 16 48% Contibution margin Fixed cost 142,400 83,000 II Operating income 59,400 20%

Case #2 Units sold ???? = contibution margin / contibution per units = 193,200 / 14 = 13800 Per units Amount 317,400 124,200 Percentage of sales 100% Sales Variable expenses 39% 14 61% Contibution margin Fixed cost 193,200 166,000 Operating income 27,200 9% Contribution Margin = Operating income + fixed cost = 27200 + 166000 = 193,200 Variable cost = Sales - Contibution margin = 317,400 - 193,200 124200

Case #3 Units sold 20,900 Sales Variable expenses Amount 459,800 292,600 Per units Percentage of sales 22 100% 14 64% - 8 36% Contibution margin Fixed cost 167,200 87,000 Operating income 80,200 17% Contribution margin = units sold x contibution per units 20,900 x 8 = 167,200 Sales Contiribution margin + Variable expenses 167,200 + 292,600 =459,800 = Operating income = Contiribution margin - Fixed cost Fixed cost = Contibution margin - operating income Fixed cost = 167,200 -80,200 = 87,000

Case #4 Units sold 4,600 Sales Variable expenses Amount 147,200 78,200 Per units Percentage of sales 32 100% 17 53% - = 15 47% Contibution margin Fixed cost 69,000 91,000 II Operating income (22,000) -15% Contribution margin = Fixed cost + operating income 91,000 + (-22,000) = 69,000 Variable expenses = sales - contibution margin 147,200 - 69,000 = 78,200 =

Question 2

Case #1 Sales Variable expenses Amount 447,000 259,260 Percentage of sales 100% 58% = 42% Contibution margin Fixed cost 187,740 117,000 = Operating income 70,740 16% Contibution margin = Sales x contibution margin ratio 447,000 x 42% = 187,740 Variable expenses = Sales - contibution margin 447,000 - 187,740 = 259,260 Fixed cost = contibution margin-operting income 187,740 - 70740 = 117,000

Case #2 Sales Variable expenses Amount 205,000 135,300 Percentage of sales 100% 66% 42% Contibution margin Fixed cost 69,700 65,000 - = Operating income 4,700 2% Contibution margin = Sales - Variable expenses 205,000 - 135,300 = 69,700 contibutin margin ratio = contibution margin / sales = 69,700 / 205,000 = 42%

Case #3 Sales Variable expenses Amount 699,000 111,840 Percentage of sales 100% 16% = 84% Contibution margin Fixed cost 587,160 471,000 = Operating income 116,160 17% Contibution margin = Fixed cost + Operating income 471,000 + 116,160 = 587,160 IF CM rati is 84 % then variable expenses ratio = 100% - 84% = 16% Sales II Contibuion margin x 100/84 587,160 x 100 / 84 = 699,000 =

Case #4 Sales Variable expenses Amount 296,000 94,720 Percentage of sales 100% 32% II 84% Contibution margin Fixed cost 201,280 221,000 Operating income (19,720) -7% Contibution margin = Sales - Variable expenses 206,000 - 94,720 = 201,280 Fixes cost = Contibution margin - Operating income 210,280 - (-19,720) = 221,000