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

Respuesta :

The degree of operating leverage is 7.5. And contribution income statement is given below.

A contribution margin income statement is one that deducts all variable expenses from sales to arrive at a contribution margin.

The net profit or loss for the period is then calculated by deducting all fixed expenses.

Therefore the contribution income statement for the game last year is as follows:

    Particulars                                    Total Amount(in $)       Per unit(in$)

    Sales                                                    300,000                      20

(-) Variable                                                  90,000                        6

=  Contribution margin                            210,000                      14

(-) Fixed expense                                       182,000

=  Net operating income                             28,000

Now, we have to calculate the degree of operating leverage.

Since the formula for calculating the degree of operating leverage is as follows:

degree of operating leverage = Contribution margin/Net operating income

Now, substituting the values in the above formula we get,

degree of operating leverage = 210000/28000

                                              = 7.5

Hence, The degree of operating leverage is 7.5.

Learn more about operating leverage:

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