EXERCISE 6–15 Operating Leverage [ LO4 , LO8]

Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $6 per game. Production of the game is entrusted to a printing contractor. Variable costs consist mostly of payments to this contractor.

Required:

1. Prepare a contribution format income statement for the game last year and compute the degree of operating leverage.

2. Management is confident that the company can sell 18,000 games next year (an increase of 3,000 games, or 20%, over last year). Compute:

a. The expected percentage increase in net operating income for next year.

b. The expected total dollar net operating income for next year. (Do not prepare an income statement;

use the degree of operating leverage to compute your answer.)