Exercise 5-9 Compute and Use the Degree of Operating Leverage [LO5-8] Engberg Co
ID: 2423968 • 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:
Compute the company’s degree of operating leverage. (Round your answer to 2 decimal places.)
Using the degree of operating leverage, estimate the impact on net operating income of a 18% 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).)
Construct a new contribution format income statement for the company assuming a 18% increase in sales.
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:
Explanation / Answer
1. Degree of operating leverage = (sale - variable cost) / (sale - variable cost - fixed cost)
= ( 148000 - 59200) / ( 148000 - 59200 - 15000)
= 88800 / 73800
= 1.20
2. degree of operating leverag = percentage change in operating income / percentage change in sale
1.20 = percentage change in operating income / 18% increase in sale
percentage increase in operating income = 18% *1.2
percentage increase in operating income = 21.6%
Operating income = 73800 + 21.6% * 73800
= 73800 + 15941
= $89741