Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:                                                  Amount                Percent of SalesSales .................................................... $ 80,000                   100%Variable expenses ............................. 32,000                     40%Contribution margin ....................... 48,000                     60%Fixed expenses .................................. 38,000Net operating income ................. $ 10,000 Required:1. What is the company’s degree of operating leverage?2. Using the degree of operating leverage, estimate the impact on net operating 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.

Question

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

                                                 Amount                Percent of Sales
Sales .................................................... $ 80,000                   100%
Variable expenses ............................. 32,000                     40%
Contribution margin ....................... 48,000                     60%
Fixed expenses .................................. 38,000
Net operating income ................. $ 10,000

Required:
1. What is the company’s degree of operating leverage?
2. Using the degree of operating leverage, estimate the impact on net operating 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.

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