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Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows: Required: a. Compute the company’s degree of operating leverage. (Round your answer to 2 decimal places.) b. Using the degree of operating leverage, estimate the impact on net operating income of a 22% 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).) c. Construct a new contribution format income statement for the company assuming a 22% increase in sales.
Expert Answer
a.DOL=Contribution/Net operating income
=(79200/54200)=1.46(Approx).
b.DOL=% change in net operating income/% change in sales
Hence % change in net operating income=(22*1.46)=32.15%(Approx).(Increase)
c.
| PArticulars | Amount($) |
| Sales(132000*1.22) | $161040 |
| Less:Variable expenses(52800*1.22) | $64416 |
| Contribution margin | $96624 |
| Less:Fixed expenses | $25000 |
| Net operating income | $71624. |
Fixed expenses do not change with change in units.
