Exercise 5-15 Operating Leverage [LO5-1, LO5-8] Magic Realm, Inc., has developed

Question

Exercise 5-15 Operating Leverage [LO5-1, LO5-8]

Magic Realm, Inc., has developed a new fantasy board game. The company sold 36,800 games last year at a selling price of $62 per game. Fixed expenses associated with the game total $644,000 per year, and variable expenses are $42 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 44,528 games next year (an increase of 7,728 games, or 21%, 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.

1-b.

2.a.

Working:

2.b.

Expected net operatin income = $92,000 + $154,560 = $246,560.

Magic Realm Inc. Contribution Format income statement for last year Sales - units 36800 Per unit Total Sales Revenue 62 2281600 Variable expenses 42 1545600 Contribution margin 20 736000 Fixed Expenses 644000 Net operating income 92000

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