Magic Realm, Inc., has developed a new fantasy board game. The company sold 47,000 games last year at a selling price of $67 per game. Fixed expenses associated with the game total $846,000 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 56,400 games next year (an increase of 9,400 games, or 20%, 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-a.
Answer 1-b.
Degree of Operating Leverage = Contribution Margin / Net
Operating Income
Degree of Operating Leverage = $940,000 / $94,000
Degree of Operating Leverage = 10
Answer 2-a.
Degree of Operating Leverage = 10
% Change in Net Operating Income / % Change in Sales = 10
% Change in Net Operating Income / 20% = 10
% Change in Net Operating Income = 200%
Answer 2-b.
Net Operating Income, Current Year = $94,000
Increase in Net Operating Income = $94,000 * 200%
Increase in Net Operating Income = $188,000
Net Operating Income, Next Year = $94,000 + $188,000
Net Operating Income, Next Year = $282,000
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