Question 3: (4 Points)

Messrs. Nathalies Corporation's contribution format income statement for the most recent month is as follows:

Sales AED 24M

Variable expenses: AED 9.6M

Contribution margin AED 14.4M

Fixed expenses AED 10M

Net operating income: AED 4.4M

Required:

a) (2 Points) Compute the degree of operating leverage and explain its meaning.

b) (1 Point) Using the degree of operating leverage, estimate the percentage change in net operating income that should result from a 10% increase in sales.

c) (1 Point) Prepare an income statement to prove your answer.