Compute and Use the Degree of Operating Leverage
Eneliko Company installs home theater systems. The company's most recent monthly contribution format income statement appears below:
| Amount | Percent of Sales |
Sales | $120,000 | 100% |
Variable expenses | 84,000 | 70% |
Contribution margin | 36,000 | 30% |
Fixed expenses | 24,000 |
|
Net operating income | $ 12,000 |
|
Required:
1. Compute the company's, degree of operating leverage.
2. Using the degree of operating leverage, estimate the impact on net operating income of a 10% increase in sales.
3. Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 10% increase in sales.
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