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 $ 146,000 58,400 87,600 20,000 $ 67,600 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 30% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 30% increase in sales.

Answer 1

1. Degree of operating leverage = Contribution margin / Net operating income

= $87,600 / $67,600

= 1.296 times (rounded to 3 decimal places)

2. Impact on net operating income = 1.296 * 30% = 0.3888

Net operating income increases by 38.88

3.

	Amount	Percent of sales
Sales	$189,800	100%
Variable expenses	$75,920	40%
Contribution margin	$113,880	60%
Fixed expenses	$20,000
Net operating income	$93,880