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
$450,000 per year. The company is currently selling 30,000 doors per
year.
|
| 1a. |
Prepare a contribution format income statement for the company at the present level of sales. (Input
all amounts as positive values except losses which should be indicated
by a minus sign. Omit the "$" 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 |
