Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 28,200 games last year at a selling price of $70 per game. Fixed expenses associated with the game total $470,000 per year, and variable expenses are $50 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 36,378 games next year (an increase of 8,178 games, or 29%, 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.)

repare a contribution format income statement for the game last year.

	Magic Realm, Inc., Contribution Income Statement Total Per Unit 0 $0 $0

Answer 1

1) a	Magic Realm, Inc.,
	Contribution Income Statement
		Total	Per Unit
	Sales Revenue	1,974,000	70
	Less: variable cost	1,410,000	50
	Contribution	564,000	20
	Less: Fixed cost	470,000
	profit	94,000
1) b	Operating Leverage = (Sales - variable cost)/ PROFIT
	=564000/94000
	6.0
2) a	It means that If sales is increase by 10% profit/Net operating income will increase by 60%
	and if SALES is increase by 29% than NOI will increase by 174%.
2) b	Magic Realm, Inc.,
	Contribution Income Statement
		Total	Per Unit
	Sales Revenue	2546460	70
	Less: variable cost	1818900	50
	Contribution	727560	20
	Less: Fixed cost	470,000
	Net income	257560