Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 29,700 games last year at a selling price of $62 per game. Fixed expenses associated with the game total $495,000 per year, and variable expenses are $42 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 38,313 games next year (an increase of 8,613 games, or 29%, 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. Reg 1A Reg 1B Reg 2 Prepare a contribution format income statement for the game last year. Magic Realm, Inc., Co Contribution Income Statement Total Per Unit S 0

Answer 1

1-a Magic Realm Inc Contribution income statement Total Per Per unit Sales $ 1,841,400 $ 62 29,700*$ 62 Less: Variable cost $ 1,247,400 $ 42 29,700*$ 42 Contribution margin S 594,000 $ 20 Less: Fixed costs $ 495,000 Net income / EBIT $ 99,000

1-b Degree of operating leverage is nothing but how much operating income increase/ decrease as result in increase or decrease in sales Degree of operating leverage = Contribution margin / Operating income = $ 594,000 / $ 99,000 6 Times Percentage of increase in operating income 2-a = Degree of operating leverage * Percentage of increase in sales = 6 * 29 174% 2-b Amount of net operating income for next year = Current operating income * Percentage of increase in operating income =$ 99,000*174% $ 172,260