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	$	145,000	100%
Variable expenses		58,000	40%
Contribution margin		87,000	60%
Fixed expenses		15,000
Net operating income	$	72,000

   

Required:
1.	Compute the company’s degree of operating leverage. (Round your answer to 2 decimal places.)

     

2.	Using the degree of operating leverage, estimate the impact on net operating income of a 25% increase in sales. (Round your intermediate calculations to 2 decimal places. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).)

         

3.	Construct a new contribution format income statement for the company assuming a 25% increase in sales.

     

Answer 1

Part 1	Degree of operating leverage = (Contribution margin/Net operating income)
	=	(87,000/72,000) = 1.21
Part 2	Impact on net operating income = (1.21*25%) = 30%
Part 3	Contribution income statement
	Sales (145,000*1.25)	181,250
	Variable expenses (58,000*1.25)	72,500
	Contribution margin	108,750
	Fixed expenses	15,000
	Net operating income	93,750
	Original net operating income	72,000
	Percent change in net operating income	30%