Question

13. acct

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		25,000
Net operating income	$	63,800

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 22% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 22% increase in sales.

Answer 1

· [1]

A	Contribution margin	88,800
B	Net Operating income	63,800
C = A/B	Degree of Operqating leverage	1.39	Answer

· [2]

A	Increase in sale	22%
B	Degree of Operqating leverage	1.39
C = A x B	Net Income INCREASES by	30.58%

· [3]

	Amount	Percent of Sales
Sales	180,560	100
Variable expenses	72,224	40
Contribution margin	108,336	60
Fixed expenses	25,000
Net operating income	83,336

	Amount	Percent of Sales
Sales	=148000+(148000*22%)	100
Variable expenses	=180560*40%	40
Contribution margin	=180560-72224	60
Fixed expenses	25000
Net operating income	=108336-25000