Exercise 5-15 Operating Leverage Magic Realm Inc.
Autor: kimsink • March 23, 2017 • Coursework • 298 Words (2 Pages) • 801 Views
Exercise 5-15 Operating Leverage
Magic Realm Inc., has developed a fantasy board game. The company sold 17,400 games last year at a selling price of 68 dollars per game. Fixed expenses associated with the game total 261,000 dollars per year, and variable expenses are 48 dollars per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payment to this contractor.
1-a. Prepare a contribution format income statement for the game last year.
Magic Realm, Inc., | |
Contribution Income Statement | |
Total | |
Sales (17,400 dollars * 68 per game) | 1,183,200 |
less variable expense | 835,200 |
Contribution Margin | 348,000 |
less fixed expenses | 261,000 |
Net operating Income | 87,000 |
1-b. Compute the degree of operating leverage
Degree of operating leverage | 4 |
= contribution margin divided by net income
= 348,000 dollars divided by 87,000 dollars
2. Management is confident that the company sell 21,576 games next year (an increase of 4,176 games, or 24 percent, over last year).
- Compute the expected percentage increase in net operating income for next year.
Net operating income increases by | 96 percent |
Net operating income increase equals percentage change multiply by degree of operating leverage
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