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 63,504 games next year (an increase of 13,104 games, or 26%, 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

Ans: 1a

Income staement for year 2018:

Particulars	Amount ($)
Sales (50,400*68)	3,427,200
variable cost (50,400*48)	2,419,200
Contribution	1,008,000
Fixed cost	924,000
Net operating Income	84,000

1b. Degree of operating leverage:

=(Sales-Variable)/(sales-variable-fixed cost)= 1,008,000/84,000 = 12

2a.

As sales increase by 26%

Net operating income = Gross Income less operating expenses.

Expected net operating income for next year : 63,504*(68-48) - $924,000 = 346,080

Net operating income for current year : 84,000

Increase in Net Operating income: (346,080-84,000)/84000*100= 312%

2b. Calculating Net operating income using operating leverage:

Increase in sales*degree of operating leverage+ current year operating income:

(63,504-50,400)*12+ 84,000 = 346,080