Company’s degree of 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.