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	$	80,000		100	%
Variable expenses		32,000		40	%
Contribution margin		48,000		60	%
Fixed expenses		38,000
Net operating income	$	10,000

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 5% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 5% increase in sales.

Answer 1

1
Contribution margin	48000
Divide by Net operating income	10000
Degree of operating leverage	4.8
2
Net operating incom increases by	24%	=5%*4.8
3
Sales	84000	=80000*1.05
Variable expenses	33600	=32000*1.05
Contribution margin	50400
Fixed expenses	38000
Net operating income	12400