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 $ 123,000 100 % Variable expenses 49,200 40 % Contribution margin 73,800 60 % Fixed expenses 19,000 Net operating income $ 54,800 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 12% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 12% increase in sales.

Answer 1

1. Degree of Operating leverage = Sales – Variable cost/Net Operating Income

OR

Contribution margin/Net operating Income

           = $73,800/$54,800

          = 1.3467

2. New Sales = $123,000 + 12%of $123,000    = $123,000 + $14,760   = $137,760

New variable cost = 40% of new sales = 40%*$137,760 = $55,104

Hence,

DOL = Sales – Variable cost

            Net Operating Income

1.346 = $137,760 - $55,104

               Net Operating Income

Net Operating Income = $82,656        = $61,408.62

   1.346

Thus, the percentage change in the net operating income is = $61,408.62 – 54,800

$54,800

                                                                                                = .12 or 12%

Engberg Company
Contribution Income Statement
	Amount $	Percent of sales
Sales	137,760	100%
Variable expenses	55,104	40%
Contribution Margin	82,656	60%
Fixed expenses	19,000
Net operating Income	63,656