E3–4 Time allowed: 15 minutes Magic Realm Ltd 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 profit and loss account 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 per cent, over last year). Compute:

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(a) The expected percentage increase in profit for next year.

(b) The expected total pound profit for next year. (Do not prepare a profit and loss account; use the degree of operating leverage to compute your answer.)