Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 46,500 games last year at a selling price of $61 per game. Fixed expenses associated with the game total $837,000 per year, and variable expenses are $41 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.

Required:

1-a.

Prepare a contribution format income statement for the game last year.

Magic Realm, Inc.,
Contribution Income Statement
	Total	Per Unit
Sales
Variable expenses
Contribution margin	0	$0
Fixed expenses
Net operating income	$0

           

1-b.	Compute the degree of operating leverage.

           

2.	Management is confident that the company can sell 58,590 games next year (an increase of 12,090 games, or 26%, over last year).

a.	Compute the expected percentage increase in net operating income for next year.

             

b.	Compute the expected total dollar net operating income for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)

            

Answer 1

1-a)

Contribution margin Income statement
sales [46500*61]	2836500	61
less:variable expense [46500*41]	(1906500)	(41)
contribution margin	930000	20
lesS:fixed expense	(837000)
Net operating income	93000

1-b)

degree of operating leverage. = Contribution /net operating income

        = 930000/93000.

       = 10

2a)expected percentage increase in net operating income for next year. =Degree of operating leverage *% increase in sales

= 10*26%

= 260 %

2b)expected total dollar net operating income for next year : current year net income (1+% increase)

          = 93000(1+2.6)

        = $ 334800