Question

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 $80 per crate, variable costs are $50 per crate, and fixed costs are $277,000 per year. In the year 2008, Florida Berry Basket sold 46,000 crates.

(a) Prepare a contribution income statement for the year ended December 31, 2008. HINT: Use a negative sign with both "costs" answers

Sales	????
Variable Costs	????
Contribution Margin	????
Fixed Costs	????
Net Income	????

(b) Determine the company's 2008 operating leverage. (Round your answer to two decimal places.)

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

(d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $377,000 and reduce variable costs to $47.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answer to two decimal places.)

Choose the correct answer:

- The acquisition of the berry-picking machines will increase variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby decreasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage

- The acquisition of the berry-picking machines will reduce variable costs, thereby increasing the contribution margin. It will also reduce fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be a decrease in operating leverage

- The acquisition of the berry-picking machines will decrease variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage

- The acquisition of the berry-picking machines will increase variable costs, thereby increasing the contribution margin. It will also decrease fixed costs, thereby decreasing the difference between the contribution margin and net income. The net effect would be a decrease in operating leverage

Answer 1

Selling price per Crate= $80

Variable cost per crate = $50

Fixed cost= $277000

Unit sold = 46000 crate

a) Income statement

Sales ($80 X 46000) $36,80,000

Less: Variable cost ($50 X 46000) $23,00,000

Contribution Margin $13,80,000

Less : Fixed cost $2,77,000

Net income $11,03,000

b) Operating Leverage: Contribution margin/ Net income

Operating Leverage: $13,80,000/ $11,03,000

Operating Leverage: 1.25

c) if sale decrease by 10% i.e. unit sold = 46000 crate X 90% = 41400 units

Sales (41400 X $80) $33,12,000

Variable cost (41400 X $50) $20,70,000

Contribution margin $12,42,000

Less fixed cost $2,77,000

Net income $9,65,000

% change in profit= Change in profit X 100/ Profit before change in sales

% change in profit= ($11,03,000 - $9,65,000) X 100 / $11,03,000

% change in profit= $1,38,00,000/ $11,03,000

% change in profit= 12.51%

There will be decrease in profit by 12.51% if sale decrease by 10%

d) new fixed cost = $3,77,000

New variable cost = $47.50

Sales ($80 X 46000) $36,80,000

Less: Variable cost ($47.50 X 46000) $21,85,000

Contribution Margin $14,95,000

Less : Fixed cost $3,77,000

Net income $11,18,000

Operating Leverage: Contribution margin/ Net income

Operating Leverage: $14,95,000/ $11,18,000

Operating Leverage: 1.34

Reason: The acquisition of the berry-picking machines will decrease variable costs, thereby increasing the contribution margin. It will also increase fixed costs, thereby increasing the difference between the contribution margin and net income. The net effect would be an increase in operating leverage

Therefore third option is correct.