Magic Realm, Incorporated, developed a new fantasy board game and sold 38,000 units last year...
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Accounting
Magic Realm, Incorporated, developed a new fantasy board game and sold 38,000 units last year at a selling price of $69 per game. Fixed expenses associated with the game are $665,000 per year, and variable expenses are $49 per game. Production of the game was outsourced to a printing contractor, so 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. Management is confident that the company can sell 49,020 games next year (an increase of 11,020 games, or 29%, 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.)
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To tackle this problem lets break it down step by step starting with the contribution format income statement and then moving on to the degree of operating leverage 1a Contribution Format Income Statement A contribution format income statement separates variable and fixed costs allowing us to see how much contribution margin is generated by sales Step 1 Calculate Total Sales textTotal Sales textNumber of Units Sold times textSelling Price per Unit textTotal Sales 38000 times 69 2622000 Step 2 Calculate Total Variable Expenses textTotal Variable
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