6-12

Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last
year at selling price of $0 per game. !i"ed costs associated with the game total $1#,000 per year,
and variable costs are $$ per game. %rod&ction of the game is entr&sted to a printing contractor.
'ariable costs consist mostly of a payment to this contractor.
Re(&ired
1. %repare a contrib&tion format income statement for the game last year and comp&te the
degree of operating leverage.
. Management is confident that the company can sell 1#,000 game ne"t year )an increase of
*,000 games, or 0+ over last year,.
-omp&te.
a. The e"pected percentage increase in net operating income for ne"t year.
b. The e"pected total dollar net operating income for ne"t year )/o not prepare an income
statement. &se the degree of operating leverage to comp&te yo&r answer.,
6-13
0longapo 1ports -orporation is the distrib&tor in the %hilippines of two premi&m golf balls2 the
!light /ynamic and 1&re 1hot. Monthly sales and the contrib&tion margin ratios for the two
prod&cts follow.
!i"ed e"pense total %1#*, 350 per month. )The c&rrency in the %hilippines is the peso, which is
denoted by %.,
Re(&ired.
1. %repare a contrib&tion format income s statement for the company as a whole. -arry
comp&tations to one decimal place.
. -omp&te the brea42even point for the company based on the c&rrent sales mi".
*. If sales in increase by %100,000 a month by how m&ch wo&ld yo& e"pect net operating income
to increase5 6hat are yo&r ass&mptions5
Product_______________________________
!light /ynamic 1&re 1hot Total
1ales77777777..%150,000 %50,000 %800,000
-M ratio7777777 #0+ *$+ 5
23- A
1ales Mi"9 :rea42;ven <nalysis9 Margin of 1afety
Island =ovelties, Inc., of %ala& ma4es two prod&cts. >awaiian !antasy and Tahitian ?oy. %resent
reven&e cost and sales data for the two prod&cts follow.
!i"ed e"pense total $835,#00 per year. The Rep&blic of %ala& &ses the @.1. dollar as its c&rrency.
Re(&ired
1. <ss&ming the sales mi" given above, do the following.
a. %repare a contrib&tion format income statement showing both dollar and percent
col&mns for each prod&ct and for the company as a whole.
b. -omp&te the brea42even point in dollar for the company as whole and the margin of
safety in both dollars and percent.

. The company has developed a new prod&ct to called 1amoan /elight. <ss&me that the
company co&ld sell 10,000 &nits at $85 each. The variable e"pense wo&ld be $*$ each. The
companyAs fi"ed e"penses wo&ld not change.
a. %repare another contrib&tions format income statement, incl&ding sales of the
1amoan /elight )sales of the other two prod&cts wo&ld not change,.
b. -omp&te the companyAs new brea42even point in dollar and the new margin of
safety in both dollars and percent.

*. The president of the company e"amines yo&r fig&res and says, ThereAs something
strange here. 0&r fi"ed costs havenAt changed and yo& show greater total contrib&tion
margin if we add the new prod&ct, b&t yo& also show o&r brea42even point going &p. 6ith
greater contrib&tion margin, the brea42even point sho&ld go down, not &p. Bo&Ave made a
mista4e somewhere.C ;"plain to the president what has happened.
>awaiian Tahitian
!antasy ?oy
1elling price per &nit7777777777.$15 $100
'ariable e"penses per &nit7777777 ..$D $0
=&mber of &nit sold ann&ally 777777.0,000 5,000