Operating leverage

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

 

Amount Percent of
Sales
Sales $ 80,000 100 %
Variable expenses 32,000 40 %
Contribution margin 48,000 60 %
Fixed expenses 38,000
Net operating income $ 10,000

 

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 5% increase in unit sales.

3. Construct a new contribution format income statement for the company assuming a 5% increase in unit sales.

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