Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 38,800 games last year at a selling price of $61 per game. Fixed expenses associated with the game total $679,000 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 47,724 games next year (an increase of 8,924 games, or 23%, 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 Reg 2 Prepare a contribution format income statement for the game last year.

Answer 1

38800 61 Units Games Selling Price Per unit Varaibel Expense Per unit Contribution Margin Fixed Expenses 41 679000 1) Prepare the Contibution Margin income Statement Contribution Margin Income Statement Contri Sales Revenue Less: Varaible Expenses Contribution Margin Fixed Expenses Net operating income Total Per unit 2366800 1590800 41 776000 679000 97000 8.0 Times 1-b) Degree of operating Leverage Degree of Operating Leverage =776000/97000 2) Maangement is increaeing Sales by 23% a) Percentage change in Net opertaing income = DOL *Increase in sales Net operating income Increased by B) Amount of Net operating income (97000*(1+184%) Total Expected Net operating income 184% 275480