Superior Door Company sells prehung doors to home builders. The doors are sold for $60 each.

Exercise 5-15 Operating Leverage [LO4, LO8]

Superior Door Company sells prehung 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.

Required:

1a.	Prepare a contribution format income statement for the company at the present level of sales. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Contribution Income Statement
	Total
Sales	$ 1,800,000
Variable expenses	1,260,000
Contribution margin	540,000
Fixed expenses	450,000
Net operating income (loss)	$ 90,000

1b.	Compute the degree of operating leverage.

Degree of operating leverage

6

2.	Management is confident that the company can sell 37,500 doors next year (an increase of 7,500 doors, or 25%, over current sales).

a.	Compute the expected percentage increase in net operating income for next year. (Omit the "%" sign in your response.)

Net operating income increases by

150  %

b.	Compute the expected net operating income for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.) (Omit the "$" sign in your response.)

Total expected net operating income

$ 225,000