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Engberg Company installs lawn sod in home yards
Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows:
Amount
Percent of Sales
Sales $ 122,000 100% Variable expenses 48,800 40% Contribution margin 73,200 60% Fixed expenses 24,000 Net operating income $ 49,200
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 16% increase in unit sales.
3. Construct a new contribution format income statement for the company assuming a 16% increase in unit sales.
Expert Solution
1. Computation of Degree of Operating Leverage:
Degree of Operating Leverage = Contribution Margin / Operating Income
= $73,200 / $49,200
= 1.49
2. If the sales increases by 16%, Degree of Operating Income = 1.49 *16%
= 23.80%
Hence the impact on net operating income is increase by 23.80%
3. PFA
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