Exercise 5-9 (Algo) Compute and Use the Degree of Operating Leverage [LO5-8]

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

	Amount			Percent of Sales
Sales	$	129,000		100	%
Variable expenses		51,600		40	%
Contribution margin		77,400		60	%
Fixed expenses		24,000
Net operating income	$	53,400

Answers 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 20% increase in unit sales.

3. Construct a new contribution format income statement for the company assuming a 20% increase in unit sales.