Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 17,000 games last year at a selling price of $64 per game. Fixed expenses associated with the game total $255,000 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. 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 21,760 games next year (an increase of 4,760 games, or 28%, 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.) 4 Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Reg 2 Management is confident that the company can sell 21,760 games next year (an increase of 4,760 games, or 28%, 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.) Show less % Net operating income increases by b. Total expected net operating income Req 18 Reg < Prey 3 of 3 !!! Next >

Answer 1

1-a. Contribution format Income statement:

A contribution format income statement shows net income through contribution margin less fixed expenses. Contribution margin is sales less variable expenses.

Magic Realm Inc. Income Statement Sales Revenue Less Variable Expenses Contribution Margin Less Fixed Expenses Net Operating Income $1,088,000 $748,000 $340,000 $255,000 $85,000

It is given,
Games sold = 17,000
Selling price per game = $64
Variable expenses per game = $44
Fixed expenses = $255,000

Sales = 17,000 × $64 = $1,088,000
Variable expenses = 17,000 × $44 = $748,000

1-b. Degree of Operating leverage = 4

Degree of Operating Leverage = Contribution Margin / Net Operating income
= $340,000 / $85,000 = 4

2-a. Net operating income increases by 112%.

Degree of operating leverage measures impact of change in sales on net income.

Percentage of increase in sales = 28%
Degree of operating leverage = 4

Expected Percentage increase in Net Operating Income = Percentage of increase in sales × Degree of operating leverage
= 28% x 4 = 112%

2-b. Total expected net operating income = $180,200

Expected amount of net operating income = Last year net operating income + Expected Percentage increase in Net Operating Income
= $85,000 + 112% of $85,000
= $85,000 + $95,200 = $180,200