Exercise - Compute and Use the Degree of Operating Leverage
Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows:
|
|
Amount
|
Percent of Sales
|
|
Sales
|
$125,000
|
100%
|
|
Variable expenses
|
50,000
|
40%
|
|
Contribution margin
|
75,000
|
60%
|
|
Fixed expenses
|
16,000
|
|
|
Net operating income
|
$59,000
|
|
Required -
1. Compute the company's degree of operating leverage.
2. Using the degree of operating leverage, estimate the impact on net operating income of a 18% increase in sales.
3. Construct a new contribution format income statement for the company assuming a 18% increase in sales.