Exercise 5-9 Compute and Use the Degree of Operating Leverage [L O5-8) Engber rg
ID: 2544475 • Letter: E
Question
Exercise 5-9 Compute and Use the Degree of Operating Leverage [L O5-8) Engber rg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows cen Sales Variable expenses Contribution margin Fixed expenses Net operating income Amount $130,000 52,000 78,000 23,000 55,000 100% 40% 60% 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 24% increase in sales. 3. Construct a new contribution format income statement for the company assuming a 24% increase in sales.Explanation / Answer
1. Degree of operating leverage = Contribution margin / Net operating income = $78,000 / $55,000 = 1.42
2. Estimated percent increase in net operating income = Degree of operating leverage × Percent increase in sales = 1.42 × 24% = 34.08%
3.
Engberg Company
Contribution Income Statement
Sales $161,200 Variable expenses $64,480 Contribution margin $96,720 Fixed expenses $23,000 Net operating income $73,720