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

	Amount			Percent of Sales
Sales	$	142,000		100	%
Variable expenses		56,800		40	%
Contribution margin		85,200		60	%
Fixed expenses		19,000
Net operating income	$	66,200

Required:

1. What is the companys degree of operating leverage?

2. Using the degree of operating leverage, estimate the impact on net operating income of a 14% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 14% increase in sales.

Magic Realm, Inc., has developed a new fantasy board game. The company sold 34,800 games last year at a selling price of $67 per game. Fixed expenses associated with the game total $609,000 per year, and variable expenses are $47 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.

Required:

1-a. Prepare a contribution format income statement for the game last year.

1-b. Compute the degree of operating leverage.

2. Management is confident that the company can sell 43,848 games next year (an increase of 9,048 games, or 26%, over last year). Given this assumption:

a. What is the expected percentage increase in net operating income for next year?

b. What is the expected amount of net operating income for next year? (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)

The following income statement was drawn from the records of Butler Company, a merchandising firm:

BUTLER COMPANY Income Statement For the Year Ended December 31, 2014
Sales revenue (6,000 units $163)	$	978,000
Cost of goods sold (6,000 units $84)		(504,000	)
Gross margin		474,000
Sales commissions (10% of sales)		(97,800	)
Administrative salaries expense		(83,000	)
Advertising expense		(30,000	)
Depreciation expense		(48,000	)
Shipping and handling expenses (6,000 units $5)		(30,000	)
Net income	$	185,200

Required
a.	Reconstruct the income statement using the contribution margin format.

b.	Calculate the magnitude of operating leverage. (Round your answer to 2 decimal places.)

c.	Use the measure of operating leverage to determine the amount of net income Butler will earn if sales increase by 10 percent. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole dollar amount.)