Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 35,600 games last year at a selling price of $62 per game. Fixed expenses associated with the game total $623,000 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 43,788 games next year (an increase of 8,188 games, or 23%, over last year). Given this assumption: a. What is the expected percentage increase in net operating income for next year

Answer 1

1a.

Magic Realm, Inc.,

Contribution format income statement

Per Unit Amount

Sales 62 2,207,200

Variable expenses 42 (1,495,200)

Contribution margin 20 712,000

Fixed expenses (623,000)

Net operating profit 89,000

1b.

Degree of operating leverage: 4

2. The expected percentage increase in net operating income for next year: 184%

Step-by-step explanation:

1a. Please refer to the answer part

1b. Degree of operating leverage = Contribution margin / net operating profit = 712,000/89,000 = 8.

2.

Expected percentage increase in net operating income for next year = Expected percentage increase in sales next year x operating leverage = 23% x 8 = 184%