Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 44,500 games last year at a selling price of $68 per game. Fixed expenses associated with the game total $801,000 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 55,180 games next year (an increase of 10,680 games, or 24%, 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.)

Magic Realm, Inc., has developed a new fantasy board game. The company sold 44,500 games last year at a selling price of $68 per game. Fixed expenses associated with the game total $801,000 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 55,180 games next year (an increase of 10,680 games, or 24%, 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 Req 2 Prepare a contribution format income statement for the game last year. Magic Realm, Inc. Contribution Income Statement Total Per Unit 0 $ 0 Req1A Reg 1B >

Answer 1

Part 1 a

Magic Realm Inc. Contribution Income Statement
	Total	Per unit
Sales	$3026000	$68
Variable expenses	2136000	48
Contribution margin	890000	$20
Fixed expenses	801000
Net operating income	$89000

Part 1 b

Degree of operating leverage = Contribution margin / Net operating income = 890000/89000 = 10

Part 2

a.	Net operating income increase by	240%
b.	Total expected net operating profit	$302600

Sales of 10680 games represent a 24% increase over last year’s sales. Because the degree of operating leverage is 10, net operating income should increase by 10 times as much, or by 240% (10 × 24%).

Expected total dollar amount of net operating income for next year = Last year's net operating income + Expected increase in net operating income next year = 89000+(89000*240%) = $302600