Supreme 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.
Required:
1. Prepare a contribution format income statement for the company at the current level of sales, and compute the degree of operating leverage.
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). Compute the following:
a. The expected percentage increase in operating income for next year.
b. The expected operating income for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)