EXERCISE 6: OPERATING LEVERAGE

Gamic Realm, Inc. has developed a new fantasy board game. The company sold 15,000 games last year at a selling price
of P20 per game. Fixed costs associated with the game total P182,000 per year, and variable costs are P6 per game.
Production of the game is entrusted to a printing contractor. Variable costs consist mostly or payments to this contractor.

REQUIRED:
1. Prepare a contribution format income statement for the game last year and compute the degree of operating leverage.
Gamic Realm, Inc.
Income Statement
For the Last Year

TOTAL PER UNIT % OF SALES

Sales (15,000 units) ₱ 300,000 ₱ 20 100%
Less: Variable Expense 90,000 6 30%
Contribution Margin ₱ 210,000 ₱ 14 70%
Less: Fixed Expenses 182,000
Net Operating Income ₱ 28,000

Degree of Operating Leverage = Contribution Margin ₱ 210,000

= = 7.50
Net Operating Income ₱ 28,000

2. Management is confident that the company can sell 18,000 games next year (an increase of
3,000 games, or 20%, over last year). Compute:
a. The expected percentage increase in net operating income for next year.
Present 15,000 sales in unit Expected 18,000 sales in unit
per month per month EXPECTED %
TOTAL PER UNIT TOTAL PER UNIT INCREASE INCREASE
Sales ₱ 300,000 20 ₱ 360,000 20 ₱ 60,000 20%
Less: Variable Expense 90,000 6 108,000 6 18,000 20%
Contribution Margin ₱ 210,000 14 ₱ 252,000 14 ₱ 42,000 20%
Less: Fixed Expenses 182,000 182,000 0 0%
Net Operating Income ₱ 28,000 70,000 ₱ 42,000 150%
 ₱ 42,000 1.5
Expected Percentage Increase in Net Operating Income for Next Year = =
₱ 28,000 or 150%

b. The expected total peso net operating income for next year. (prepare an income statement, use the degree
of operating ever to compute your answer)
Expected Net Operating Income for Next Year = 20% × 7.5 (DOL)
150% × P28,000
P42,000

EXERCISE 7: LEVEL OF SALES REQUIRED TO ATTAIN A TARGET PROFIT

Min Corporation has a single product whose selling price is P120 a whose variable cost is P80 per unit.
The company's monthly fixed expense is P50,000.

REQUIRED:
1. Using the equation method, solve for the unit sales that are required to earn a target profit of P10,000.
Sales = Variable Expenses + Fixed Expenses + Profits
P120Q = P80Q +P50,000 + P10,000
40Q = P60,000
Q = P60,000/P40
Q = 1,500 units

2. Using the contribution margin approach, solve for the peso sales that are required to earn a target profit of P15,000.
CM Ratio = P40/P120 = 0.33 or 33%

Peso Sales to Attain the Target Profit = Fixed Expenses + Target Profit/CM Ratio
P50,000 + P15,000/0.33
P65,000/0.33 = P196,969.70