Magic Realm, Inc., has developed a new fantasy board game. The company sold 29,4

Question

Magic Realm, Inc., has developed a new fantasy board game. The company sold 29,400 games last year at a selling price of $61 per game. Fixed expenses associated with the game total $490,000 per year, and variable expenses are $41 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. , Management is confident that the company can sell 35,574 games next year (an increase of 6174 games, or 21%, 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.)

Explanation / Answer

1-a    Contribution income statement

1-b Degree of operating leverage = Contribution margin / net operating income

= 588000 / 98000

= 6

2-a Degree of operating leverage = percentage change in operating income/ percantage change in sales

6 = percentage change in operating income/ 21% increase in sales

126% = increase in operating income

2-b Net operating income for next year

last year Net operating income = $98000

Add: Expected increase in net operating income in next year (98000*126%) = $123480

        Net operating income for next year = $221480

Sales (29400*$61) 1793400 less: variable cost (29400 * $41) 1205400 Contribution margin 588000 less: Fixed cost 490000 Net operating income $98000

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.