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Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO6-8] Engberg Company installs lawn sod in...

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Accounting

Exercise 6-9 Compute and Use the Degree of Operating Leverage[LO6-8]

Engberg Company installs lawn sod in home yards. The company’smost recent monthly contribution format income statementfollows:

AmountPercent of Sales
Sales$127,000100%
Variable expenses50,80040%
Contribution margin76,20060%
Fixed expenses23,000
Net operating income$53,200

Required:

1. What is the company’s degree of operating leverage?

2. Using the degree of operating leverage, estimate the impacton net operating income of a 16% increase in sales.

3. Construct a new contribution format income statement for thecompany assuming a 16% increase in sales.

Answer & Explanation Solved by verified expert
3.6 Ratings (281 Votes)

Solution

Degree of operating leverage = 1.43

If sales increase by 16% operating income will increase by 22.88%

Engberg Company
Contribution income statement
Amount
Sales revenue $      147,320.00
Variable costs $         58,928.00
Contribution margin $         88,392.00
Fixed cost $         23,000.00
Net Operating income $         65,392.00

Working

Degree of operating leverage = Contribution margin /Net operating income
Degree of operating leverage = 76200/53200
Degree of operating leverage =                        1.43

.

Operating leverage = Change in operating income / Change in sales
Change in operating income = Operating leverage x Change in sales
Change in operating income = 1.43 x 16%
Change in operating income = 22.88%

.
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