Question

In: Accounting

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

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.

Solutions

Expert Solution

--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

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