Magic Realm, Inc., has developed a new fantasy board game. The company sold 43,0

Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 43,000 games last year at a selling price of $60 per game. Fixed expenses associated with the game total $774,000 per year, and variable expenses are $40 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 55,470 games next year (an increase of 12,470 games, or 29%, over last year) Given this assumption 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

1-a

1-b degree of operating leverage = contribution margin / operating income

=860000 / 86000

= 10

2-a Degree of operating income = change in operating income / change in sales

  10 =  change in operating income / 29% increase in sale

290% = increase in operating income

2-b net operating income = 86000 + [290% * 86000]

= 86000 + 249400

= $335400

Total per unit sales $2580000 $60 less: variable cost 1720000 40 contribution margin 860000 20 less: fixed cost 774000 Net operating income 86000

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