Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 9,400 games last year at a selling price of $63 per game. Fixed expenses associated with the game total $94,000 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 11,844 games next year (an increase of 2,444 games, or 26%, 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. Magic Realm, Inc., Contribution Income Statement Total Per Unit

Answer 1

Contribution Income Statement Total Per unit Sales Variable cost Contribution Fixed cost Net income $ 592,200 $ $ 404,200 $ $ 188,000 $ $ 94,000 $ 94,000 63 43 20

1b .

Operating leverage = Contribution / Net income

= 188,000 / 94,000

= 2

2a.

Operating leverage = % increase in Net income / % increase in Sales

2 = % increase in Net income / 26

% increase in Net income = 26 x 2

= 52%

2b.

Next year Net income = Current income + % increase in Net income

= 94,000 + 52%

= $142,880