Magic Realm, Inc., has developed a new fantasy board game. The company sold 19,400 games last year at a selling price of $68 per game. Fixed expenses associated with the game total $291,000 per year, and variable expenses are $48 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.

Magic Realm, Inc., has developed a new fantasy board game. The company sold 19,400 games last year at a selling price of $68 per game. Fixed expenses associated with the game total $291,000 per year, and variable expenses are $48 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 23,474 games next year (an increase of 4,074 games, or 21%, 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
1-a.
Sales: 19,400 games × $68 = $1,319,200

1-b.
The degree of operating leverage is:

Degree of operating leverage	=	Contribution margin
		Net operating income
	=	$388,000	= 4
		$97,000

2.
a.
Sales of 23,474 games represent a 21% increase over last year’s sales. Because the degree of operating leverage is 4, net operating income should increase by 4 times as much, or by 84% (4 × 21%).

b.
The expected total dollar amount of net operating income for next year would be:

Last year’s net operating income	$	97,000
Expected increase in net operating income next year (84% × $97,000)		81,480
Total expected net operating income	$	178,480

Thank you!

Milden Company is a merchandiser that plans to sell 43,000 units during the next quarter at a selling price of $67 per unit. The company also gathered the following cost estimates for the next quarter:

Milden Company is a merchandiser that plans to sell 43,000 units during the next quarter at a selling price of $67 per unit. The company also gathered the following cost estimates for the next quarter:

Cost	Cost Formula
Cost of good sold	$34 per unit sold
Advertising expense	$190,000 per quarter
Sales commissions	5% of sales
Shipping expense	$36,000 per quarter + $4.00 per unit sold
Administrative salaries	$100,000 per quarter
Insurance expense	$11,000 per quarter
Depreciation expense	$70,000 per quarter

Required:
1. Prepare a contribution format income statement for the next quarter.
 

 Explanation

1.
Sales (43,000 units × $67 per unit) = $2,881,000
Cost of goods sold (43,000 units × $34 unit) = $1,462,000
Sales commission (5% × $2,881,000) = $144,050
Shipping expense (43,000 units × $4.00 per unit) = $172,000


2. Prepare a traditional format income statement for the next quarter.

 

Explanation

Sales (43,000 units × $67 per unit) = $2,881,000
Cost of goods sold (43,000 units × $34 unit) = $1,462,000
Sales commission (5% × $2,881,000) = $144,050
Shipping expense [$36,000 + (43,000 units × $4.00 per unit)] = $208,000

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