Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 53,400 games last year at a selling price of $70 per game. Fixed expenses associated with the game total $979,000 per year, and variable expenses are $50 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 67,818 games next year (an increase of 14,418 games, or 27%, 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 18 Reg 2 Management is confident that the company can sell 67,818 games next year (an increase of 14,418 games, or 27%, over last year). Given this assumption: a. What is the expected percentage increase in net operating income for next year? . 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 C Reg 18

Answer 1

Answer 1-a:

Magic Realm, Inc, Contribution format Income Statement For the year ended XXXX Total Sales Revenue $3,738,000 Variable expenses $2,670,000 Contribution margin $1,068,000 Fixed expenses $979,000 Net Operating Income $89,000 Per Unit $70.00 $50.00 $20.00 $18.33 $1.67

Working:

Sales revenue = 53400 * 70 = $3,738,000

Variable cost = 53400 * $50 = $2,670,000

Answer 1-b:

Degree of operating leverage (DOL) = Contribution margin / (Contribution margin - Fixed expenses)

= 1068000 / (1068000 - 979000)

= 12

Degree of operating leverage = 12

Answer 2-a:

Expected percentage increase in net operating income next year = Expected % age in sales * DOL

= 27% * 12

= 324%

Expected percentage increase in net operating income next year = 324%

Answer 2-b:

Expected amount of net operating income next year = Net operating income of current Year * (1 + 324%)

= 89000 * 424%

= $377,360

Expected amount of net operating income next year = $377,360