Magic Realm, Inc., has developed a new fantasy board game. The company sold 24,900 games last year at a selling price of $66 per game. Fixed expenses associated with the game total $415,000 per year, and variable expenses are $46 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.

Required:
a. Prepare a contribution format income statement for the game last year.
b. Compute the degree of operating leverage.
c. Compute the expected percentage increase in net operating income for next year.
d. 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.)

Answer:

Part a

contribution format income statement

Sales                                                      $1,643,400

Less Variable Costs                             ($1,145,400)

Contribution                                            $498,000

Less Fixed Costs                                    ($415,000)

Net Income (Loss)                                    $83,000

Part b

6.00

Part c

See explanation

Part d

See explanation

Explanation:

Contribution Income Statement separates variable costs and fixed costs as shown above.

Degree of operating leverage =  Contribution ÷ Earnings Before Interest and Tax

                                                   = $498,000 ÷ $83,000

                                                   = 6.00

Part c and Part d

Since there is missing information related to these parts here are the explanations.

The expected percentage increase in net operating income for next year.

Calculated by multiplying the percentage change in sales by the degree of operating leverage.

The expected total dollar net operating income for next year.

Simply apply the expected percentage increase calculated in part c to the existing Net Profit

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