Question

Contribution Income Statement and Operating Leverage
Florida Berry Basket harvests early-season strawberries for shipment throughout the eastern United States in March. The strawberry farm is maintained by a permanent staff of 10 employees and seasonal workers who pick and pack the strawberries. The strawberries are sold in crates containing 100 individually packaged one-quart containers. Affixed to each one-quart container is the distinctive Florida Berry Basket logo inviting buyers to "Enjoy the berry best strawberries in the world!" The selling price is $100 per crate, variable costs are $85 per crate, and fixed costs are $275,000 per year. In the year 2013, Florida Berry Basket sold 50,000 crates.

(a) Prepare a contribution income statement for the year ended December 31, 2013. HINT: Use a negative sign with both "costs" answers.

FLORIDA BERRY BASKET Income Statement For the Year Ended December 31, 2013
Sales
Variable costs
Contribution margin
Fixed costs
Net income

(b) Determine the company's 2013 operating leverage. (Round your answer to two decimal places.)
Answer

(c) Calculate the percentage change in profits if sales decrease by 10 percent. (Round your answer to one decimal place.)
Answer

% decrease

(d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $375,000 and reduce variable costs to $81.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answers two decimal places.)

Answer 1

FLORIDA BERRY BASKET IDCOME stakment foo the yeax Ended December 31, 2013 sales C50000 x 1001 5,000,000 Less: vanable cost C so,000X85 contaibution margin 4.250 000 FSO,000 25 000 Less fixed cost 475000 Net ncome (b) Opesating everage I58 contribution Ret Income 2-Operating levedage F 750,000 $475000 158 15.8% (l0 change in Paofit if sales decbease by 10 deca ease in sale Openating leveaage x I58 X 10% OI56 07 - change IS.8

planned ncome sta tement CS0000 5 (00) sales 6 5000,000 4075 000 Less: vana ble cost CSO,000 x 81.50) contaibution mogin P925000 3F5000 Less: fixed cost $ 550,000 Netihrome OPedciting leveaage 925000 SO000 168 ncreased OPesating reveadg-e EXPlanation: The acquistion of machine oill which Teduce v anable teads to incease in contabution mady Cost differena betcween contmbution It Jnreases The maxgin and net InCome Neteffect uouid be Inease in opeagtig leveage