Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 33,200 games last year at a selling price of $67 per game. Fixed expenses associated with the game total $581,000 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 41,168 games next year (an increase of 7,968 games, or 24%, 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.)

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

Magic Realm, Inc.,
Contribution Income Statement
	Total	Per Unit
	0	$0
	$0

Degree of operating leverage

Management is confident that the company can sell 41,168 games next year (an increase of 7,968 games, or 24%, 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.)

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a.	Net operating income increases by		%
b.	Total expected net operating income

Answer 1

1) a	Magic Realm, Inc.,
	Contribution Income Statement
		Total	Per Unit
	Sales Revenue	2224400	67
	Less: variable cost	1560400	47
	Contribution	664000	20
	Less: Fixed cost	581000
	profit	83000
1) b	Operating Leverage = (Sales - variable cost)/ PROFIT
	=664000/83000
		8 or 80%
	Caluclation of profit
	Contribution margin at 200 Units	664000
	Less: Fixed Cost	581000
	Profit	83000
	It means that If sales is increase by 10% profit/Net operating income will increase by 80%
	and if SALES is increase by 20% than NOI will increase by 40%.
2) a	It means that If sales is increase by 10% profit/Net operating income will increase by 80%
	and if SALES is increase by 24% than NOI will increase by 192%.
	Magic Realm, Inc.,
	Contribution Income Statement
		Total	Per Unit
	Sales Revenue	2758256	67
	Less: variable cost	1934896	47
	Contribution	823360	20
	Less: Fixed cost	581000
	Net income	242360