Exercise 5-9 Compute and Use the Degree of Operating Leverage [LO5-8]

Engberg Company installs lawn sod in home yards. The companys most recent monthly contribution format income statement follows:

		Amount	Percent of Sales
Sales	$	128,000	100%
Variable expenses		51,200	40%
Contribution margin		76,800	60%
Fixed expenses		16,000
Net operating income	$	60,800

Required:

1.

Compute the companys degree of operating leverage. (Round your answer to 2 decimal places.)

Degree of operating leverage

2.

Using the degree of operating leverage, estimate the impact on net operating income of a 20% 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).)

Net operating income

by

%

3.

Construct a new contribution format income statement for the company assuming a 20% increase in sales.

Engberg Company
Contribution Income Statement
	Total
Sales
Variable expenses
Contribution margin	0
Fixed expenses
Net operating income	$0