Magic Realm, Inc, has developed a new fantasy board game. The company sold 16,80

Question

Magic Realm, Inc, has developed a new fantasy board game. The company sold 16,800 games last year at a selling price of $65 per game. Fixed expenses associated with the game total $252,000 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 20,496 games next year (an increase of 3,696 games, or 22%, 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

1 a Contribution Income statement

1.b Degree of Operating leverage

Degree of operating leverage = Contribution margin/Net operating income

= $336000/$84000

= 4

2.a Sales of 20,496 games represent a 22% increase over last year’s sales. Because the degree of operating leverage is 4, net operating income should increase by 4 times as much, or by 88% (4 × 22%).

2.b Expected amount of net operating income for next year

Last year's Net operating income $84,000

Expected increase in Net operating income next year ($84000*88%) $73,920

Total Expected Net operating income $157,920

PARTICULARS TOTAL PER UNIT Sales $1,092,000 $65 Variable expenses $756,000 $45 Contribution margin $336,000 $20 Fixed Expenses $252,000 Net operating income $84,000

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