Question

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

Answer 1

Using the degree of operating leverage, the estimated impact on net operating income of a 5 % increase in sales is 6.45%.

The degree of operating leverage (DOL) measures how much a company's operating income varies in response to sales fluctuations.

The DOL ratio assists analysts in determining how changes in sales affect company earnings.

Because a company with high operating leverage has a high proportion of fixed costs, a significant increase in sales can result in significant changes in profits.

If sales increase by 5%, the calculation for increased Net Operating Income is as follows:

Increase in Net Operating Income = Sales Increase x Degree of Operating Leverage

                                                      = 5% x 1.29

                                                      = 6.45%

Hence, Using the degree of operating leverage, estimated impact on net operating income of a 5 % increase in sales is 6.45%.

Learn more about operating leverage:

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