Question

Magic Realm, Inc. has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $21 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $7 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of payments to this contractor.

Required:

1-a.	Prepare an income statement for the game last year.

        

1-b.	Compute the degree of operating leverage. (Round your answer to 1 decimal place.)

        

2.	Management is confident that the company can sell 17,850 games next year (an increase of 2,850 games, or 19%, over last year). Compute the following:

	a.	The expected percentage increase in net income for next year. (Do not round intermediate calculations.)

           

	b.	The expected total dollar net income for next year. (Do not round intermediate calculations.)

             

Answer 1

1-a)
Income Statement
Last Year
Sales Revenue (15,000 games * $21 per game)	$315,000
Less: Variable costs (15,000 games * $7 per game)	($105,000)
Contribution Margin	$210,000
Less: Fixed Costs	($182,000)
Net Operating Income	$28,000
1-b)
Contribution Margin (a)	$210,000
Net Operating Income (b)	$28,000
Degree of Operating Leverage (a/b)	7.5
2-a)
Income Statement
	Last Year	Next Year
Sales Revenue (15,000 games * $21 per game); (17,850 games * $21 per game)	$315,000	$374,850
Less: Variable costs (15,000 games * $7 per game); (17,850 games * $7 per game)	($105,000)	($124,950)
Contribution Margin	$210,000	$249,900
Less: Fixed Costs	($182,000)	($182,000)
Net Operating Income	$28,000	$67,900
Expected percentage increase in net income ($67,900/$28,000*100 = 243% - 100% = 143%)	143%
2-b)
Expected total dollar net income for next year is $67,900 as calculated.