Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 19,400 games last year at a selling price of $67 per game. Fixed expenses associated with the game total $291,000 per year, and variable expenses are $47 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 24,250 games next year (an increase of 4,850 games, or 25%, 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

1a
Contribution Income Statement
	Total	Per unit
Sales	1299800	67
Variable expenses	911800	47
Contribution margin	388000	20
Fixed expenses	291000
Net operating income	97000
1b
Contribution margin	388000
Divide by Net operating income	97000
Degree of Operating leverage	4
2a
Net operating income increases by	100%	=25%*4
b
Net operating income	97000
Add: Net operating income increase	97000	=97000*100%
Total expected Net operating income	194000