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	$	133,000		100	%
Variable expenses		53,200		40	%
Contribution margin		79,800		60	%
Fixed expenses		18,000
Net operating income	$	61,800

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 15% increase in sales.

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

Answer 1

--Requirement 1

A	Contribution margin	$79,800
B	Net Operating Income	$61,800
C = A/B	Degree of Operating Leverage	1.29	ANSWER

--Requirement 2

A	Increase in Sale	15%
B	Degree of Operating Leverage	1.29
C = A x B	Net Operating Income INCREASE by	19.35%

--Requirement 3

	Amount	Percent of Sales
Sales	$152,950 [133000 x 1.15]	100%
Variable expenses	$61,180	40%
Contribution margin	$91,770	60%
Fixed expenses	$18,000
Net operating income	$73,770