Compute and Use the Degree of Operating Leverage [LO8]

Eneliko Company installs home theater systems. The company’s most recent monthly contribution format income statement appears below:

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 10%
increase in sales.
3. Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 10% increase in sales.

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Percent Amount of Sales Sales Variable expenses Contribution margin Fixed expenses $120,000 100% 84,000 70% 36,000 30% 24,000 Net operating income $ 12,000