Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed expense associated with the game total $182,000 per year, and variable expense are $6 per game. Production of the game is entrusted to a printing contractor. Variable expense 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. (Round your answer to 1 decimal place.)
2.
Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year).

a.
Compute the expected percentage increase in net operating income for next year. (Do not round intermediate calculations.)

b.
Compute the expected total dollar net operating income for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.) (Do not round intermediate calculations.)

Answer 1

1b) 7.5

2a) 150℅

2b) $70,000

Step-by-step explanation:

1-a) Contribution income format for last year will be:

Magic Realm Inc.

Contribution Income Statement

Total Per Unit

Sales: $300,000 $20

Variable:. 90,000 6

Contribution

margin: 210,000 $14

Fixed

expense:. 182,000

Net operating

income:. $28,000

1b) Degree of operating leverage will be:

Degree of operating leverage
`= (Contribution margin)/(Net operating income)`

Therefore, we now have:

`= (210000)/(28000)` = 7.5

2a) The expected percentage increase=

Since the degree of operating leverage is 7.5, net operating income should increase by 7.5 times

= 7.5 × 20% = 150℅

2b) Total dollar amount of net operating income for next year would be:

Given:

Last year's net operating income = $28,000

Therefore, the expected increase in net operating income next year = 150% × $28,000 = $42,000

The total expected net operating income would be : $28,000 + $42,000 = $70,000