Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income Amount $ 98,000 39, 200 58,800 47,040 $ 11,760 Percent of Sales 100% 40 60% 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 7% increase in unit sales. 3. Construct a new contribution format income statement for the company assuming a 7% increase in unit sales.
Engberg Company installs lawn sod in home yards. The company's most recent monthly contribution format income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income Amount $ 98,000 39, 200 58,800 47,040 $ 11,760 Percent of Sales 100% 40 60% 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 7% increase in unit sales. 3. Construct a new contribution format income statement for the company assuming a 7% increase in unit sales.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Step 1: Meaning of DOL and contribution margin:
Degree of operating leverage( DOL) :— It is calculated by dividing total contribution margin by net operating income.
It is also calculated by dividing a % change in operating income by a the % change in sales.
Contribution margin :— It is the difference between sales revenue and variable cost.
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