Question

Magic Realm, Incorporated, has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed expenses associated with the game total $182,000 per year, and variable expenses are $6 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. Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year). Given this assumption: a. What is the expected percentage increase in net operating income for next year

Answer 1

The Net operating income on the income statement is $28,000 and the degree of operating leverage is 7.5.

What is operating income?

The operating income is a financial statement that determines the revenue left after deducting the the costs from sales revenue.

   Income statement for Magic Realm, Inc

Particulars                                                  Amount

Sales revenue  (15,000 * $20)                  $300,000

Less: Variable expenses (15,000 * $6)     $90,000  

Contribution income                                 $210,000

Less: Fixed cost                                          $182,000

Net operating income                               $28,000

Degree of operating leverage = Contribution income / Net operating income

Degree of operating leverage = $210,000 / $28,000

Degree of operating leverage = 7.5

In conclusion, the Net operating income on the income statement is $28,000 and the degree of operating leverage is 7.5.

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