Superior Door Company sells pre-hung doors to home builders. The doors are sold

Question

Superior Door Company sells pre-hung doors to home builders. The doors are sold for $60 each. Variable costs are $42 per door and fixed costs total $450,000 per year. The company is currently selling 30,000 doors per year.

1. Prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage.

2. Management is confident that the company can cell 37,500 total doors next year (an increase of 7,500 doors, or 25% over current sales). Compute the expected operating income for next year. (Do NOT prepare an income statement; use the degree of operating leverage to compute your answer).

Explanation / Answer

Revenue = 60 x 30000 = $1800000 Variable costs = 42 x 30000 = $1260000 Contribution = 1800000 - 1260000 = $540000 Degree of operating leverage = 540000/(540000-450000) = 6 Expected operating income = 6 x 37500 = $225000 Hope this helps!

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