Exercise 5-9 Compute and Use the Degree of Operating Leverage [LO5-8] Engberg Co
ID: 2334016 • Letter: E
Question
Exercise 5-9 Compute and Use the Degree of Operating Leverage [LO5-8] Engberg Company installs lawn sod in home yards.
The company’s most recent monthly contribution format income statement follows: Amount Percent of Sales Sales $ 149,000 100% Variable expenses 59,600 40% Contribution margin 89,400 60% Fixed expenses 24,000 Net operating income $ 65,400 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 19% 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).)
3. Construct a new contribution format income statement for the company assuming a 19% increase in sales.
Explanation / Answer
Given Particulars $ Sales 149000 Less: Variable Expenses 59600 Contribution Margin 89400 Less: Fixed Expenses 24000 Net Operating Income 65400 Answer to Part 1: 1. Computation the company’s degree of operating leverage. Degree of Operating Income Contribution Margin/Net operating Income Degree of Operating Income 89400/65400 Degree of Operating Income 1.37 Interpretation: If sales increases by 1%, the net income will also increase by 1.37 times 2. Estimation the impact on net operating income of a 19% increase in sales. Particulars Percentage increase in sales 19% Degree of Operating Income 1.37 Impact on Net Operating income [(19%*1.37)*100] 26.03% Answer to Part 3: Particulars $ Sales (149000*119%) 177310 Less: Variable Expenses (59600*119%) 70924 Contribution Margin [(117310 - 70924) 106386 Less: Fixed Expenses 24000 Net Operating Income (106386 - 24000) 82386