Question

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

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 15% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 15% increase in sales.

Amount			Percent of Sales
Sales	$	144,000		100	%
Variable expenses		57,600		40	%
Contribution margin		86,400		60	%
Fixed expenses		20,000
Net operating income	$	66,400

Answer 1

1. Degree of Operating leverage = Contribution Margin / Net Operating Income
= $86400 / 66400 = 1.30

2.
Net Operating income will increase by 15% x 1.30 i.e. 19.5%
In dollars = $66400 x 19.5% = $12948 or $12960 approx

3.

Sales	$       1,65,600
Variable Expenses	$          66,240
Contribution Margin	$          99,360
Fixed Expenses	$          20,000
Net Operating Income	$          79,360