Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 16,600 games last year at a selling price of $67 per game. Fixed expenses associated with the game total $249,000 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 21,414 games next year (an increase of 4,814 games, or 29%, 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.)

Complete this question by entering your answers in the tabs below. Req 1A Req 1B Reg 2 Prepare a contribution format income statement for the game last year. Magic Realm, Inc. Contribution Income Statement Total Per Unit Req1A Req 1B >

Answer 1

Answer to Req 1A: Magic Realm, Inc. Contribution Income Statement Total Sales 1,112,200 Variable Expenses 780,200 Contribution Margin 332,000 Fixed Expenses 249,000 Net Operating Income 83,000 Per Unit 67 47 20

Answer to Req 1B:

Degree of Operating Leverage = Contribution Margin / Operating Income
Degree of Operating Leverage = $332,000 / $83,000
Degree of Operating Leverage = 4 times

Answer to Req 2A:

Degree of Operating Leverage = Percentage change in Operating Income / Percentage change in Sales
4 = Percentage change in Operating Income / 29
Percentage change in Operating Income = 116%

Answer to Req 2B:

Expected amount of Net Operating Income = Current Net Operating Income + Change in Net Operating Income
Expected amount of Net Operating Income = $83,000 + ($83,000 * 116%)
Expected amount of Net Operating Income = $179,280