Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 16,400 games last year at a selling price of $62 per game. Fixed expenses associated with the game total $246,000 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.

1A. Prepare a contribution format income statement for the game last year1B. Compute the degree of operating levarge2. Management is confident that the company can sell 33,306 games next year (an increase of 6,006 games, or 22%, over last year).A. Compute the expected percentage increase in net operating income for next yearB. Compute the expected total dollar net operating income for next year (Do not prepare an income statement, use the degree of leverage to compute your answer)

Answer 1

1A. Prepare a contribution format income statement for the game last year

Revenue $1,016,800

Variable costs -$688,800

Contribution margin $328,000

Fixed costs -$246,000

Net income $82,000

1B. Compute the degree of operating leverage

DOL = contribution margin / (contribution margin - fixed costs) = ($20 x 16,400) / [($20 x 16,400) - $246,000] = $328,000 / $82,000 = 4

2. Management is confident that the company can sell 22,406 games next year (an increase of 6,006 games, or 22%, over last year).A. Compute the expected percentage increase in net operating income for next year

DOL = % change in income / % change in total sales

4 = % change in income / 22%

% change in income = 4 x 22% = 88%

B. Compute the expected total dollar net operating income for next year (Do not prepare an income statement, use the degree of leverage to compute your answer)

expected dollar amount of net income = $82,000 x 1.88 = $154,160