Magic Realm, Inc., has developed a new fantasy board game. The company sold 56,400 games last year at a selling price of $61 per game. Fixed expenses associated with the game total $1,034,000 per year, and variable expenses are $41 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.

1-b. Compute the degree of operating leverage.

2. Management is confident that the company can sell 71,064 games next year (an increase of 14,664 games, or 26%, over last year).

Given this assumption:

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

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.)

2. Menlo Company distributes a single product. The companys sales and expenses for last month follow:

Tota Per Unit

Sales $ 632,000 $ 40

Variable expenses 442,400 28

Contribution margin 189,600 $ 12

Fixed expenses 154,800

Net operating income $ 34,800

Required: 1. What is the monthly break-even point in unit sales and in dollar sales?

2. Without resorting to computations, what is the total contribution margin at the break-even point?

3-a. How many units would have to be sold each month to attain a target profit of $51,600?

3-b. Verify your answer by preparing a contribution format income statement at the target sales level.

4. Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms.

5. What is the companys CM ratio? If sales increase by $94,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?