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	$	148,000		100	%
Variable expenses		59,200		40	%
Contribution margin		88,800		60	%
Fixed expenses		18,000
Net operating income	$	70,800

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 17% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 17% increase in sales.

Answer 1

1.)	Degree of Operating Leverage:-
	Degree of operating Leverage = Contribution Margin/ Net operating Income
	= 88,800 / 70,800
	= 1.2542
2.)	Estimation of Impact on Net Operating Income:-
	Expected % increase in Net operating Income	= Degree of operating leverage x percentage change in sale
		= 1.2542 x 17%
		= 21.3214%
3.)	New contribution format income Statement assuming 17% increase in Sales:-
	Particulars	Amount in $	Working
	Sales	173,160	(148,000 x 117% )
	Less: variable expenses	- 69,264	(40% of 173,160 )
	Contribution Margin	103,896
	Less: Fixed expenses	-18,000	Given
	Net Operating Income	85,896