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 expenses associated with the game total $182,000 per year, and variable expenses are $6 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.

Question -

1. Prepare a contribution format income statement for the company at the current level of sales, 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 current sales). Compute the following:

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

b.The expected operating income for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)