Question

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 Sales $139,000 Variable expenses 55,600 Contribution margin 83,400 Fixed expenses 20,000 Net operating income $ 63,400 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 11% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 11% increase in sales.

Answer 1

1.

Degree of operating leverage = Contribution margin/Net operating income

= 83,400/63,400

= 1.3154574132

2.

Increase in operating income = Increase in sales x Degree of operating leverage

= 11% x 1.3154574132

= 14.47%

3.

Contribution margin income statement

Sales	139,000 x 111% = 154,290	100%
Variable cost	55,600 x 111% = 61,716	40%
Contribution margin	92,574	60%
Fixed cost	20,000
Operating income	$72,574

Due to increase in sales by 11%, variable costs will also increase by 11%

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