Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 56,400 games last year at a selling price of $61 per game. Fixed expenses associated with the game total $1,034,000 per year, and variable expenses are $41 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 71,064 games next year (an increase of 14,664 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.)

2. Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

Tota Per Unit

Sales $ 632,000 $ 40

Variable expenses 442,400 28

Contribution margin 189,600 $ 12

Fixed expenses 154,800

Net operating income $ 34,800

Required: 1. What is the monthly break-even point in unit sales and in dollar sales?

2. Without resorting to computations, what is the total contribution margin at the break-even point?

3-a. How many units would have to be sold each month to attain a target profit of $51,600?

3-b. Verify your answer by preparing a contribution format income statement at the target sales level.

4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.

5. What is the company’s CM ratio? If sales increase by $94,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

Answer 1

1 (a) sales - variable expenses - contribution margin - fixed expenses - net operating income 3,440,400 2,312,400 1,128,000 1,034,000 94,000 1 b degree of operating leverage 12 ($1128000 $94000) expected percentage increase in net operating income for next year 2 (a) degree of operating leverage * % increase in sales quantity expected percentage increase in net operating income for next vear expected percentage increase in net operating income for next vear 12 26 312% expected amount of net operating income for next vear expected amount of net operating income for next vear 2 (b) $94000 + ($94000*312%) 387,280

total per unit sales S 632,000 40 442,400 28 $ 189,600 12 variable expenses - contribution margin fixed expenses net operating income S 154,800 34,800 12900 $154800/12 12900 40 1 lbreak even point (units break even point (S) S 516,000 2 at break even point, total contribution margin is equal to the fixed expenses i.e. $154,800 for target profit, required contribution margin- contribution margin per unit - required units- $206,400 $51600+$154800 12 17200 3 (b) total S 688,000 $ 481,600 $ 206,400 variable expenses - contribution margin fixed expenses net operating income 154,800 $ 51,600 4 margin of safety ($ $ 116,000 $632000 $516000 margin of safe 18.35%) S116000 / $632000 company's CM ratio- net operating income shall increase 12/$40 S94000 * 30% 30% 28.200 |