Question

magic realm, incorporated, developed a new fantasy board game and sold 18,400 units last year at a selling price of $67 per game. fixed expenses associated with the game are $276,000 per year, and variable expenses are $47 per game. production of the game was outsourced to a printing contractor, so 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 23,368 games next year (an increase of 4,968 games, or 27%, 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.)

Answer 1

The contribution format income statement for the game shows a net operating income of $92,000. With a degree of operating leverage of 4, a 27% increase in units sold next year is expected to result in a 108% increase in net operating income, which equates to an expected net operating income of $190,560 for next year.

Step-by-step explanation:

Contribution Format Income Statement

Here's the contribution format income statement for the game last year:

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• Sales (18,400 units × $67 each): $1,232,800
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• Variable Expenses (18,400 units × $47 each): $864,800
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• Contribution Margin ($1,232,800 - $864,800): $368,000
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• Fixed Expenses: $276,000
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• Net Operating Income ($368,000 - $276,000): $92,000

Degree of Operating Leverage

The degree of operating leverage at 18,400 units:

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• Contribution Margin: $368,000
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• Net Operating Income: $92,000
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• Operating Leverage (Contribution Margin / Net Operating Income): 4

Expected Increase in Net Operating Income:

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• Percentage increase in units sold: 27%
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• Degree of Operating Leverage: 4
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• Expected percentage increase in Net Operating Income: 27% × 4 = 108%

Net Operating Income for Next Year:

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• Current Net Operating Income: $92,000
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• Percentage increase: 108%
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• Expected Net Operating Income: 108% of $92,000 = $190,560