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. What are the variable expenses per unit?

2. Using the equation method:

  A. What is the break-even point in units and in sales dollars?

  B. What sales level in units and in sales dollars is required to earn an annual profit of $90,000?

  C. Assume that through negotiations with the manufacturer the Super Sales Company is able to reduce it's variable expenses by         

        $3 per unit. What is the company's new break-even point in units and in sales dollars?

3. Repeat question 2 using the formula method.

Explanation / Answer

a. prepare a contribution format income statement for the company at the present level of sales and compute the degree of operating leverage.
Sales $1,800,000 ($30,000 doors x 60 units)
Variable expenses 1,260,000 ($30,000 x 42 units)
Contribution margin $540,000
Fixed expenses 450,000
Operating income $90,000

Degree of operating leverage = Contribution margin / Net operating income
$540,000 / 90,000 = 6

b. management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25%, over current sales). compute the ff:
1. the expected percentage increase in net operating income for next year.
25% x 6 = 150% increase in net operating income

2. the expected net operating income for next year. (do not prepare an income statement; use the degree of operating leverage to compute your answer.)
Present net operating income $90,000
Expected increase in net operating income 135,000 (150% x $90,000)
Total expected net operating income $225,000

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