Magic Realm, Inc., has developed a new fantasy board game. The company sold 51,0

ID: 2414828 • Letter: M

Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 51,000 games last year at a selling price of $61 per game. Fixed expenses associated with the game total $935,000 per year, and variable expenses are $41 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 63,240 games next year (an increase of 12,240 games, or 24%, 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) Income Statement:-

Total

Per Unit

Sales (51000 * 61)

3111000

(-) Variable Exp (51000 * 41)

2091000

Contribution

1020000

(-) Fixed Exp

935000

Net Operating Income

85000

(1b) Degree of Operating Leverage = Contribution/Operating Income

= 1020000/85000 = 12

(2a) Sale Increase by 12240 games i.e 24% over last year,

Then net operating income increase = %age increase in sale * Degree of operating leverage

= 24% * 12 = 288%

(2b) Amount of Operating income of next year after increase of sale = 85000 + (85000 * 288%) = 329800