Magic Realm, Inc., has developed a new fantasy board game. The company sold 19,8

Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 19,800 games last year at a selling price of $65 per game. Fixed expenses associated with the game total $297000 per year, and variable expenses are $45 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 25,740 games next year (an increase of 5,940 games, or 3O%, 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)

Explanation / Answer

1a Total Per unit Sales 1287000 65 Variable expenses 891000 45 Contribution margin 396000 20 Fixed expenses 297000 Net operating income 99000 b Degree of operating leverage = 396000/99000= 4 2a Expected percentage increase = 30%*4 = 120% b Net operating income = 99000+(99000*120%)= $217800

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