Magic Realm, Inc., has developed a new fantasy board game. The company sold 32,8
ID: 2572639 • Letter: M
Question
Magic Realm, Inc., has developed a new fantasy board game. The company sold 32,800 games last year at a selling price of $61 per game. Fixed expenses associated with the game total $574,000 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. Magic Realm, Inc., Contribution Income Statement Total Per Unit 1-b.Compute the degree of operating leverage. Degree of operating everage 2. Management is confident that the company can sell 40,672 games next year (an increase of 7,872 games, or 24%, over last year). a. Compute the expected percentage increase in net operating income for next year Net operating income ncreases by 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 perating incomeExplanation / Answer
1-a. Prepare a contribution margin income statement for the game last year
Magic Realm, Inc.,
Contribution Income Statement
Total
Per unit
Sales
$20,00,800
$61
Less: Variable costs
$13,44,800
$41
Contribution Margin
$6,56,000
$20
Less: Fixed costs
$5,74,000
Net Income
$82,000
1-b. Compute the degree of operating leverage.
Degree of Operating leverage
= Contribution Margin / Operating Income
= $656,000 / 82,000
8.00
2 (a) Compute the expected percentage increase in net operating income for next year.
Percentage increase in sales
24%
Degree of Operating leverage
8
Percentage increase in net operating income
192%
2 (b) Compute the expected total net operating income for next year.
Present net Income
$82,000
Percentage increase in net operating income
192%
Increase in net income
$1,57,440
Expected net income for next year
$2,39,440
1-a. Prepare a contribution margin income statement for the game last year
Magic Realm, Inc.,
Contribution Income Statement
Total
Per unit
Sales
$20,00,800
$61
Less: Variable costs
$13,44,800
$41
Contribution Margin
$6,56,000
$20
Less: Fixed costs
$5,74,000
Net Income
$82,000
1-b. Compute the degree of operating leverage.
Degree of Operating leverage
= Contribution Margin / Operating Income
= $656,000 / 82,000
8.00
2 (a) Compute the expected percentage increase in net operating income for next year.
Percentage increase in sales
24%
Degree of Operating leverage
8
Percentage increase in net operating income
192%
2 (b) Compute the expected total net operating income for next year.
Present net Income
$82,000
Percentage increase in net operating income
192%
Increase in net income
$1,57,440
Expected net income for next year
$2,39,440
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