Exercise 5-9 Compute and Use the Degree of Operating Leverage[LO5-8] Engberg Company installs lawn...

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Accounting

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 incomestatement follows: Amount Percent of Sales Sales $ 149,000 100%Variable expenses 59,600 40% Contribution margin 89,400 60% Fixedexpenses 24,000 Net operating income $ 65,400 Required:
1. Compute the company’s degree of operating leverage. (Roundyour answer to 2 decimal places.)
2. Using the degree of operating leverage, estimate the impacton net operating income of a 19% increase in sales. (Round yourintermediate calculations to 2 decimal places. Round yourpercentage answer to 2 decimal places (i.e .1234 should be enteredas 12.34).)
3. Construct a new contribution format income statement for thecompany assuming a 19% increase in sales.

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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

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In: AccountingExercise 5-9 Compute and Use the Degree of Operating Leverage[LO5-8] Engberg Company installs lawn sod...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 incomestatement follows: Amount Percent of Sales Sales $ 149,000 100%Variable expenses 59,600 40% Contribution margin 89,400 60% Fixedexpenses 24,000 Net operating income $ 65,400 Required:1. Compute the company’s degree of operating leverage. (Roundyour answer to 2 decimal places.)2. Using the degree of operating leverage, estimate the impacton net operating income of a 19% increase in sales. (Round yourintermediate calculations to 2 decimal places. Round yourpercentage answer to 2 decimal places (i.e .1234 should be enteredas 12.34).)3. Construct a new contribution format income statement for thecompany assuming a 19% increase in sales.