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 $110 per crate, variable costs are $90 per crate, and fixed
costs are $272,000 per year. In the year 2008, Florida Berry Basket
sold 49,000 crates.
(a) Prepare a contribution income statement for the year ended
December 31, 2008. HINT: Use a negative sign with both "costs"
answers.
FLORIDA BERRY
BASKET Income Statement For the Year Ended December 31, 2008 |
|
---|---|
Sales | $Answer |
Variable costs | Answer |
Contribution margin | Answer |
Fixed costs | Answer |
Net income | $Answer |
(b) Determine the company's 2008 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 $372,000 and
reduce variable costs to $87.50 per crate. Calculate the effect of
this acquisition on operating leverage and explain any change.
(Round your answer to two decimal places.)
Answer
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 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 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.
Answers
FLORIDA BERRY BASKET |
|
Income Statement |
|
For the Year Ended December 31, 2008 |
|
Sales |
$5,390,000 |
Variable costs |
($4,410,000) |
Contribution margin |
$980,000 |
Fixed costs |
($272,000) |
Net income |
$708,000 |
A |
Contribution margin |
$980,000 |
B |
Net income |
$708,000 |
C = A/B |
Operating Leverage |
1.38 |
A |
Decrease in Sale |
10% |
B |
Operating Leverage |
1.38 |
C = A x B |
% change in profits |
13.8% [profits will decrease by 13.8%] |
Correct Answer is Option #2
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.
New Net Income:
FLORIDA BERRY BASKET |
|
Income Statement |
|
For the Year Ended December 31, 2008 |
|
Sales |
$5,390,000 |
Variable costs |
($4,287,500) |
Contribution margin |
$1,102,500 |
Fixed costs |
($372,000) |
Net income |
$730,500 |
A |
Contribution margin |
$1,102,500 |
B |
Net income |
$730,500 |
C = A/B |
NEW Operating Leverage |
1.51 |
Contribution Income Statement and Operating Leverage Florida Berry Basket harvests early-season strawberries for shipment throughout the...
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...
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...
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...
Exercise 2-13A Using contribution margin format income statement to measure the magnitude of operating leverage LO 2-3, 2-4 The following income statement was drawn from the records of Stuart Company, a merchandising firm: STUART COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (8,000 units X $170) $1,360,000 Cost of goods sold (8,000 units * $81) (648,000) Gross margin 712,000 Sales commissions (10% of sales) (136,000) Administrative salaries expense (89,000) Advertising expense (31,000) Depreciation expense (41,000) Shipping...
Exercise 11-15 Using contribution margin format income statement to measure the magnitude of operating leverage LO 11-3, 11-4 The following income statement was drawn from the records of Vernon Company, a merchandising firm: VERNON COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (7,000 units X $161) Cost of goods sold (7,000 units * $88) Gross margin Sales commissions (100 of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (7.000 units x $1,127,000...
ACCT 2301 Operating Leverage Handout #8 d cot ha Contribution margin income statements for two competing companies are provided below: Anthe Alpha Cempany Revenue Less variable costs Contribution margin Less fixed costs Net income Gamma Company $500,000 200.000 $300,000 270.000 $30,000 $500,000 350,000 $150,000 120.000 $30,000 Required: 1) Show each company's cost structure by inserting the percentage of the company's revenue represented by each item on the contribution income statement: Alpha Company $500,000 200,000 $300,000 Gemma Company $s00.000 350,000 $150,000...
WESTERWHEAT Contribution Margin Income Statement 150,000 units sold Total Per Unit Percent Sales revenue $1,950,000 $13.00 1008 Less: Variable 1,200,000 8.00 620 costs Contribution $ 750,000 $ 5.00 388 Less: Fixed costs 350,000 Net operating $ 400,000 income Knowledge Check 01 What is Westerwheat's degree of operating leverage? 2143 4.875 1.875 3.000 Knowledge Check O2 A 20 percent increase in sales revenue will increase net operating Income by 42.86% 97.50% 60.00% 37.50% Knowledge Check 03 Decreasing fixed costs by $100,000...
Exercise 2-13A Using contribution margin format income statement to measure the magnitude of operating leverage LO 2-3, 2-4 The following income statement was drawn from the records of Munoz Company, a merchandising firm: MUNOZ COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (6,500 units X $168) Cost of goods sold (6,500 units X $85) Gross margin Sales commissions (5% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (6,500 units X $3)...
Exercise 11-15 Using contribution margin format income statement to measure the magnitude of operating leverage LO 11-3, 11-4 The following income statement was drawn from the records of Munoz Company, a merchandising firm: MUNOZ COMPANY Income Statement For the Year Ended December 31, 2018 Sales revenue (6,500 units x $167) Cost of goods sold (6,500 units X $85) Gross margin Sales commissions (5% of sales) Administrative salaries expense Advertising expense Depreciation expense Shipping and handling expenses (6,500 units X $4)...
Hudson Co. reports the contribution margin income statement for 2019. HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (9,800 units at $289 each) Variable costs (9,800 units at $210 each) Contribution margin Fixed costs E Pretax income $2,520,000 1,890,000 $ 630,000 420,000 $ 210,000 1. Compute the company's degree of operating leverage for 2019. 2. If sales decrease by 6% in 2020, what will be the company's pretax income? 3. Assume sales for 2020 decrease...