Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 50,400 games last year at a selling price of $64 per game. Fixed expenses associated with the game total $924,000 per year, and variable expenses are $44 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.

1-b. Compute the degree of operating leverage.

2. Management is confident that the company can sell 64,008 games next year (an increase of 13,608 games, or 27%, over last year). Given this assumption:

a. What is the expected percentage increase in net operating income for next year?

b. What is the expected amount of 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

Income Statement
Particulars		Amount
Sales	(50400*64)	3225600
(-) Variable Cost	(50400*44)	2217600
Contribution		1008000
(-) Fixed Cost		924000
EBIT		84000

Degree of Operating Leverage = Contribution / EBIT

= 1008000/84000

= 12 Times

2 -a

Degree of Operating Leverage = % Change in Operating Income/ % Change in sales

12 = % Change in operatin Income / 27

% Change in Operating Income = 27*12

= 324%

2-b New Operating income (EBIT) = Existing EBIT + % Change in EBIT

= 84000 + 324%

= 356160