Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 29,400 games last year at a selling price of $61 per game. Fixed expenses associated with the game total $490,000 per year, and variable expenses are $41 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contracto. 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 36,162 games next year (an increase of 6,762 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.) Complete this question by entering your answers in the tabs below Req 1A Req 2 Req 1B Prepare a contribution format income statement for the game last year. Magic Realm, Inc. Contribution Income Statement Per Unit Total Complete this question by entering your answers in the tabs below. Req 2 Req 1A Req 1B Compute the degree of operating leverage Degree of operating leverage Req 1A Req 2 Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 Management is confident that the company can sell 36,162 games next year (an increase of 6,762 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.) Show less a. Net operating income increases by b. Total expected net operating income Req 1B Req 2

Answer 1

1a)

Contribution format income statement

Sales (29,400 x 61)	1,793,400
Variable cost (29,400 x 41)	- 1,205,400
Contribution margin	588,000
Fixed costs	- 490,000
Net Operating income	98,000

1b)

Degree of operating leverage = Contribution margin/Net operating income

= 588,000/98,000

= 6

2a)

Degree of operating leverage = % Change in operating income/% change in sales

6 = % increase in operating income/23%

% increase in operating income = 138%

2b)

Expected net operating income = 98,000 + 98,000 x 138%

= 98,000 + 135,240

= $233,240

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