Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 25,200 games last year at a selling price of $69 per game. Fixed expenses associated with the game total $420,000 per year, and variable expenses are $49 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 30,744 games next year (an increase of 5,544 games, or 22%, 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

Contribution Format Income Statement
Sales Unit	25,200
Sales @ $69	$1,738,800.00
less: Variable Expense @ $49	$1,234,800.00
Contribution	$504,000.00
Less; Fixed Expense	-$420,000.00
Net Income	$84,000.00

1-b Degree of Operating Leverage = Contribution/ Net Income

=504000/84000=6 times

Part-2 (a)

Expected increase in net Income by = 22%X 6=132%

Part-2(b)

Expected amount of Income in next year= ($84000+ ($84000*132%))= $194880