Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 28,800 games last year at a selling price of $63 per game. Fixed expenses associated with the game total $480,000 per year, and variable expenses are $43 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 36,576 games next year (an increase of 7,776 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.)

Answer 1

	Total	per unit
Sales	1,814,400	63
Variable expenses	1,238,400	43
Contribution margin	576,000	20
Fixed cost	480,000
Net operating income	96,000

.

1-b. Degree of operating leverage = Contribution margin/Net operating income = 576,000/96,000

= 6

.

2.

Net operating income increases by (6*27)%	162%
Expected net operating income (96,000+162%)	251,520