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

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

	Amount			Percent of Sales
Sales	$	142,000		100	%
Variable expenses		56,800		40	%
Contribution margin		85,200		60	%
Fixed expenses		17,000
Net operating income	$	68,200

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 30% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 30% increase in sales.

Explanation

1.

The company’s degree of operating leverage would be computed as follows:

Contribution margin (a)	$	85,200
Net operating income (b)	$	68,200
Degree of operating leverage (a) ÷ (b)		1.25

2.

A 30% increase in sales should result in a 37.50% increase in net operating income, computed as follows:

Degree of operating leverage (a)	1.25
Percent increase in sales (b)	30	%
Estimated percent increase in net operating income (a) × (b)	37.50	%

3.

The new income statement reflecting the change in sales is:

Net operating income reflecting change in sales	$	93,760
Original net operating income (a)		68,200
Change in net operating income (b)	$	25,560
Percent change in net operating income (b) ÷ (a)		37.48	%

Thanks