Magic Realm, Inc., has developed a new fantasy board game. The company sold 36,8
ID: 2489452 • Letter: M
Question
Magic Realm, Inc., has developed a new fantasy board game. The company sold 36,800 games last year at a selling price of $69 per game. Fixed expenses associated with the game total $644,000 per year, and variable expenses are $49 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.
Management is confident that the company can sell 47,104 games next year (an increase of 10,304 games, or 28%, over last year).
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.)
Total expected net operating income:
Magic Realm, Inc., has developed a new fantasy board game. The company sold 36,800 games last year at a selling price of $69 per game. Fixed expenses associated with the game total $644,000 per year, and variable expenses are $49 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.
Management is confident that the company can sell 47,104 games next year (an increase of 10,304 games, or 28%, over last year).
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.)
Total expected net operating income:
Explanation / Answer
Solution:
Degree of operating Leverage Contribution / Net operating income Sales - $ 69 * 36,800 units 2,539,200 Less: Variable costs - $ 49 * 36,800 units 1,803,200 Contribution 736,000 Less: Fixed Expense 644,000 Net operating income 92,000 Degree of operating leverage = $ 736,000 / $ 92,000 8.0 This means if sales increase by 34 %, net income will increase by 8 times Expected Net operating income - $ 92,000 * 8 736,000.0Related Questions
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