Determine and Use the Degree of Operating Leverage.
Engberg Company installs lawn sod in home yards. The company most recent monthly contribution format income statement follows:
|
|
Amount
|
Percent of Sales
|
|
Sales
|
$80,000
|
100%
|
|
Less variable expanses
|
32,000
|
40%
|
|
Contribution margin
|
48,000
|
60%
|
|
Less fixed expenses
|
38,000
|
|
|
Net operating income
|
$10,000
|
|
Required:
1. Compute the company degree of operating leverage.
2. Using the degree of operating leverage, estimate the impact on net income of a 5% increase in sales.
3. Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 5% increase in sales.