Question

Exercise 2-9 (Algo) Compute and Use the Degree of Operating Leverage (LO2-8] Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Percent of Sales 100% 40% Amount $ 127,000 50, 800 76,200 18,000 $ 58,200 Sales Variable expenses Contribution margin Fixed expenses Net operating income 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 22% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 22% 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

Answer to Requirement 1:

Degree of operating leverage = Contribution margin / Net operating income
Degree of operating leverage = $76,200 / $58,200
Degree of operating leverage = 1.31

Answer to Requirement 2:

Degree of operating leverage = % Change in net operating income / % Change in sales
1.31 = % Change in net operating income / 22.00%
% Change in net operating income = 28.82%

Answer to Requirement 3:

Sales Variable expenses Contribution margin Fixed expenses Net operating income Amount 154,940 61,976 92,964 18,000 74,964 Percent of Sales 100% 40% 60% $

Sales = $127,000 + 22.00% * $127,000
Sales = $154,940