Engberg Company installs lawn sod in home yards. The company’s most recent month

Question

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

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.

Amount Percent of Sales Sales $ 140,000 100 % Variable expenses 56,000 40 % Contribution margin 84,000 60 % Fixed expenses 17,000 Net operating income $ 67,000

Explanation / Answer

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

1. Company's Operating Leverage Contribution Margin 84000 Net Operating Income 67000 Operating Leverage (84000/67000) 1.253731 2. Using the degree of operating leverage, estimate the impact on net operating income of a 15% increase in sales. Operating Leverage (84000/67000) 1.253731 % Increase in Sales 15% Impact on net operating Income i.e., Operating Income increase by (1.253731*15%) 18.81%

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

Particulars Calculation $ Sales 140000*115% 161000 Variable Expenses 56000*115% 64400 Contribution Margin (161000-64400) 96600 Fixed Expenses 17000 Net Operating Income (96600-17000) 79600

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