Question

15 Magic Realm, Inc., has developed a new fantasy board game. The company sold 32,400 games last year at a selling price of $64 per game. Fixed expenses associated with the game total $567,000 per year, and variable expenses are $44 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor. oints eBook 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 39,852 games next year (an increase of 7,452 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.) Print References Complete this question by entering your answers in the tabs below.

Answer 1

Answer:

Question 1-a Contribution Margin Statement Particulars Amount Calculation Sales Revenue $2,073,600 (32,400 X $64) Less: Variable Costs $ 1,425,600 (32,400 X $44) Contribution Margin $ 648,000 (2,073,600 - 1,425,600) Less: Fixed Cost $ 567,000 Net Income $ 81,000 (648,000 - 567,000) Question 1-b 1 Degree of operating leverage = Contribution Margin/Net income 2 Degree of operating leverage = $648,000/$81,000 3 Degree of operating leverage = 8.00 t 5 Question 2-a 5 Increase in Net Operating Income = Percentage Increase in Sales X Operating Leverage 7 Increase in Net Operating Income = 23 X 8.00 3 Increase in Net Operating Income = 184% Question 2-b 1 Expected Increase in Net Operating Income = Net Income X Percentage Increase in Net Income 2 Expected Increase in Net Operating Income = $81,000 X 184% Expected Increase in Net Operating Income = $149,040