Chapter 3 Hw C D Not secure ezto.mheducation.com/hm.tpx Engberg Company installs

Question

Chapter 3 Hw C D Not secure ezto.mheducation.com/hm.tpx Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income Amount $ 145,000 58,000 87,000 24,000 Percent of Sales 100% 40% 60% $63,000 Required 1. Compute the company's degree of operating leverage. (Round your answer to 2 decimal places.) 2 Using the degree of operating leverage, estimate the impact on net operating income of a 20%increase in sales. Round your intermediate calculations to 2 decimal places. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).) 9%

Explanation / Answer

1. Degree of Operating Leverage (DOL)

DOL = Sales - Variable Cost / (Sales - Variable Cost - Fixed Cost)

        = $145,000 - $58,000 / ($145,000 - $58,000 - $24,000)

        = $87,000 / $63,000

DOL = 1.38 times

2. In response to a 20% increase in sales, operating income will increase by 27.6% ( 1.38 x 20%)

So the opearting income will be $80,388 ($63,000 + {$63,000 x 20%})

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