Magic Realm, Inc., has developed a new fantasy board game. The company sold 9,500 games last year at a selling price of $65 per game. Fixed expenses associated with the game total $95,000 per year, and variable expenses are $45 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.

Magi Real, Inc

Contribution Income Statement

TotalPer Unit

Sales

Variable expenses

Contribution margin

Fixed expenses

Net operation income

1-b. Compute the degree of operating leverage.

2. Management is confident that the company can sell 11,685 games next year (an increase of 2,185 games, or 23%, over last year). Given this assumption:

2-a. What is the expected percentage increase in net operating income for next year?

2-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.)