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
