Question

Exercise 5-9 Compute and Use the Degree of Operating Leverage [LO5-8] Engberg Company installs lawn sod in home yards.

The company’s most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $ 149,000 100% Variable expenses 59,600 40% Contribution margin 89,400 60% Fixed expenses 24,000 Net operating income $ 65,400 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 19% 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 19% increase in sales.

Answer 1

Given
Particulars	$
Sales	149000
Less: Variable Expenses	59600
Contribution Margin	89400
Less: Fixed Expenses	24000
Net Operating Income	65400
Answer to Part 1:
1. Computation the company’s degree of operating leverage.
Degree of Operating Income	Contribution Margin/Net operating Income
Degree of Operating Income	89400/65400
Degree of Operating Income	1.37
Interpretation: If sales increases by 1%, the net income will also increase by 1.37 times
2. Estimation the impact on net operating income of a 19% increase in sales.
Particulars
Percentage increase in sales	19%
Degree of Operating Income	1.37
Impact on Net Operating income [(19%*1.37)*100]	26.03%
Answer to Part 3:
Particulars	$
Sales (149000*119%)	177310
Less: Variable Expenses (59600*119%)	70924
Contribution Margin [(117310 - 70924)	106386
Less: Fixed Expenses	24000
Net Operating Income (106386 - 24000)	82386