1 answer

Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income...

Question:

Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:

Amount Percent of Sales
Sales $ 137,000 100 %
Variable expenses 54,800 40 %
Contribution margin 82,200 60 %
Fixed expenses 17,000
Net operating income $ 65,200

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 12% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 12% increase in sales.


Answers

1
Contribution margin 82200
Divide by Net operating income 65200
Degree of operating leverage 1.26
2
Increase in sales 12%
X Degree of operating leverage 1.26
Net operating income increases by 15.12%
3
Amount Percent of Sales
Sales 153440 100% =137000*1.12
Variable expenses 61376 40% =153440*40%
Contribution margin 92064 60%
Fixed expenses 17000
Net operating income 75064
.

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