Magic Realm, Inc, has developed a new fantasy board game. The company sold 42,00

Question

Magic Realm, Inc, has developed a new fantasy board game. The company sold 42,000 games last year at a selling price of $62 per game. Fixed expenses associated with the game total $756,000 per year, and varlable 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. Managements confident that the company can sen 53 760 games next year an increase of 1,760 games, or 28% 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

1a) Income Statement :-

1b) Degree of Operating Leverage(DOL) :-

= Contribution Margin / Net Operating Income

= $840000 / $84000

= 10 times

2a) Net Operating Income Increases by :-

DOL = % change in operating Income / % change in Sales

% change in Operating Income = DOL * % change in Slaes

= 10 times * 28%

= 280%

2b) Expected Net Operating Income of Next Year :-

= (Contribution Margin per unit * Total Sales unit) - Fixed Cost

= ($20 * 53760) - $756000

= $1075200 - $756000

= 319200

Particulars Amount($) Per unit Sales (42000*$62) 2604000 $62 Less : Variable Cost (42000*$42) (1764000) ($42) Contribution 840000 $20 Less : Fixed Cost (756000) ($18) Net Operating Income 84000 $2

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