Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 50,400 games last year at a selling price of $68 per game. Fixed expenses associated with the game total $924,000 per year, and variable expenses are $48 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 65,520 games next year (an increase of 15,120 games, or 30%, 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.

Magic Realm Inc.
Contribution Income Statement
	Total	Per unit
Sales	$3427200	$68
Variable expenses	2419200	48
Contribution margin	$1008000	20
Fixed expenses	924000
Net operating income(loss)	$84,000

b. Degree of operating leverage = Contribution margin/Net operating income

= 1008000 / 84000 = 12 times

2.a. Net operating income increases by = Degree of operating leverage*increase in sales

= 12*30% = 360%

b. Expected amount of net operating income = 84000*1.46 = $386400