Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 9,200 games last year at a selling price of $70 per game. Fixed expenses associated with the game total $92,000 per year, and variable expenses are $50 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 11,684 games next year (an Increase of 2,484 games, or 27%, 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. Reg 1A Req 1B Reg 2 Prepare a contribution format income statement for the game last year. Magic Realm, Inc., Contribution Income Statement Total Sales $ 9,200 Administrative expenses tive expenses Contribution margin 9,200 Purchases Net operating income $ 9,200 Per Unit $ 70 50 $ 20 Reg 1A Req 1B >

Answer 1

1a) Contribution margin income statement

	Total	Per unit
Sales revenue	644000	70
Variable cost	460000	50
Contribution margin	184000	20
Fixed cost	92000
Net income	92000

1b) Degree of operating leverage = Contribution margin/Net income = 184000/92000 = 2

2a) Increase in net income = 27*2 = 54%

2b) Expected net income = 92000*1.54 = 141680