Explanation:
1. a. Contribution format income statement for the game last year and compute the degree of operating leverage
Magic Realm, Inc.
Contribution Income Statement
Total Per Unit
Sales                                $300,000            $20
Variable                            90,000                6
Contribution margin        210,000            $14
Fixed expense                 182,000
Net operating income      $28,000
1.b. Compute the degree of operating leverage
The degree of operating leverage is:
Degree of operating leverage = Contribution margin/Net operating income
                                                    
= $210,000/$28,000 
                                                    = 7.5
2. a. Sales of 18,000 games represent a 20% increase over last year's sales. Because the degree of operating leverage is 7.5, net operating income should increase by 7.5 times as much, or by 150% (7.5 × 20%).
                                                    = 150%
2.b. The expected total dollar amount of net operating income for next year would be:
Last year's net operating income         $28,000
Expected increase in net operating income
next year                                  (150% × $28,000) 42,000
Total expected net operating income       $70,000