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 $ 126,000 100 % Variable expenses 50,400 40 % Contribution margin 75,600 60 % Fixed expenses 23,000 Net operating income $ 52,600 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 27% increase in unit sales. 3. Construct a new contribution format income statement for the company assuming a 27% increase in unit sales.

Answer 1

See answer below

Step-by-step explanation:

1. Degree of operating leverage

Selling price $126,000

Variable cost $50,400

Contribution margin $75,600

Fixed cost $23,000

Net operating income $52,600

Degree of operating leverage = Contribution margin / operating income = $75,600 / $52,600

= 1.44