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Exercise 6-15 (Algo) Operating Leverage [LO6-1, LO6-8]
Magic Realm, Incorporated, has developed a new fantasy board game. The company sold 37,200 games last year at a
selling price of $61 per game. Fixed expenses associated with the game total $651,000 per year, and variable expenses are
$41 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 46,128 games next year (an increase of 8,928 games, or 24%, 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.)
Complete this question by entering your answers in the tabs below.
Req 1A
Req 1B
Req 2
Prepare a contribution format income statement for the game last year.
Magic Realm, Incorporated,
Contribution Income Statement
Sales
Variable expenses
Total
Per Unit
