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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:

| Amount          | Percent of Sales |
|-----------------|------------------|
| Sales           | $98,000          | 100% |
| Variable expenses | 39,200         | 40%  |
| Contribution margin | 58,800       | 60%  |
| Fixed expenses   | 47,040          |      |
| Net operating income | $11,760     |      |

**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.

Complete this question by entering your answers in the tabs below.

**Required 1:**  
What is the company’s degree of operating leverage? (Round your answer to 2 decimal places.)

[Input field for Degree of operating leverage]
Transcribed Image Text:Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows: | Amount | Percent of Sales | |-----------------|------------------| | Sales | $98,000 | 100% | | Variable expenses | 39,200 | 40% | | Contribution margin | 58,800 | 60% | | Fixed expenses | 47,040 | | | Net operating income | $11,760 | | **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. Complete this question by entering your answers in the tabs below. **Required 1:** What is the company’s degree of operating leverage? (Round your answer to 2 decimal places.) [Input field for Degree of operating leverage]
Expert Solution
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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