Question

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Magic Realm, Inc., has developed a new fantasy board game. The company sold 18,200 games last year at a selling price of $63 per game. Fixed expenses associated with the game total $273,000 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 22.750 games next year (an increase of 4,550 games, or 25%, 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

18200 63 43 Units Games Selling Price Per unit Varaibel Expense Per unit Contribution Margin Fixed Expenses 1) Prepare the Contibution Margin income Statement Contribution Margin Income Statement 20 273000 Total Per unit 1146600 782600 364000 273000 91000 Sales Revenue Less: Varaible Expenses Contribution Margin Fixed Expenses Net operating income 1-b) Degree of operating Leverage Degree of Operating Leverage =364000/91000 2) Maangement is increaeing Sales by 25% a) Percentage change in Net opertaing income = DOL *Increase in sales Net operating income Increased by B) Amount of Net operating income (91000*(1+100%) Total Expected Net operating income 4.0 Times 100% 182000