Question

Magic Realm, Incorporated, has developed a new fantasy board game. The cornpany sold 24.900 games fast year at a selling price of $62 per game. Fixed expenses associated with the game total $415,000 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 30.627 games next year (an increase of 5.727 games, or 23%, over last year) Given this assumption 3. 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 income statement shows a net operating income of $83,000, the degree of operating leverage is 6, leading to an expected 138% increase in net operating income for next year, which is $197,540.

Step-by-step explanation:

To prepare a contribution format income statement for Magic Realm, Inc., we need to calculate the contribution margin, fixed expenses, and then the net operating income. Since the company sold 24,900 games at $62 each, the total sales will be 24,900 games times $62, which is $1,543,800. Variable expenses are $42 per game, which totals to $42 times 24,900 for $1,045,800. Therefore, the contribution margin is sales minus variable expenses, resulting in $1,543,800 - $1,045,800 = $498,000. After deducting the fixed expenses of $415,000, we arrive at the net operating income: $498,000 - $415,000 = $83,000.

The degree of operating leverage is calculated by dividing contribution margin by net operating income, which gives us $498,000 / $83,000 = 6. Thus, with each percentage increase in sales volume, we expect the operating income to increase by six times that percentage.

With a 23% increase in sales volume for the next year, we can expect a 23% * 6 = 138% expected percentage increase in net operating income. Therefore, the expected net operating income for next year would be $83,000 * (1 + 138%) = $197,540.