Question

Magic Realm, Inc. has developed a new fantasy board game. The company sold 14,000 games last year at a selling price of $20 per game. Fixed costs associated with the game total $180,000 per year, and variable costs are $5 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of payments to this contractor.

Required:

1-a.	Prepare an income statement for the game last year.

        

1-b.	Compute the degree of operating leverage. (Round your answer to 1 decimal place.)

        

2.	Management is confident that the company can sell 16,940 games next year (an increase of 2,940 games, or 21%, over last year). Compute the following:

	a.	The expected percentage increase in net income for next year. (Do not round intermediate calculations.)

           

	b.	The expected total dollar net income for next year. (Do not round intermediate calculations.)

             

Answer 1

14000 Units Games Selling Price Per unit Varaibel Expense Per unit Contribution Margin Fixed Expenses 180000 1) Prepare the Contibution Margin income Statement Contribution Margin Income Statement Sales Revenue Less: Varaible Expenses Contribution Margin Fixed Expenses Net operating income Total Per unit 280000 70000 210000 180000 30000 7.0 Times 1-b) Degree of operating Leverage Degree of Operating Leverage =210000/30000 2) Maangement is increaeing Sales by 21% a) Percentage change in Net opertaing income = DOL *Increase in sales Net operating income Increased by B) Amount of Net operating income (30000*(1+147%) Total Expected Net operating income 147% 74100