Contribution Income Statement and Operating Leverage Florida Berry Basket harves

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 $Answer Variable costs Answer Contribution margin Answer Fixed costs Answer Net income $Answer (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 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. Check

Explanation / Answer

A./

CONTRIBUTION INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31 2013

B./

OPERATING LEVERAGE = CONTRIBUTION / NET INCOME

   = $750000 / $475000

   = 1.58

C./

SALES DECEREASE BY 10%

DECEREASE IN NET INCOME = ($475000 - $400000) / $475000

= 18.75%

D./

PURCHASE OF SEVERAL BERRY PICKING MACHINE, INCEREASE FIXED COST TO $375000 DECEREASE VARIABLE COST TO $81.50 PER CRATE

OPERATING LEVERAGE = CONTRIBUTION / NET INCOME

   = $925000 / $550000

   = 1.68

BY ACCURING THE SEVERAL BERRY PICKING MACHINES THE CONTRIBUTION MARGIN AS WELL AS THE NET INCOME INCEREASED, WHICH RESULTS INCEREASE IN OPERATING LEVERAGE,

SO IT IS WISER TO PURCHASE THE SEVERAL BERRY PICKING MACHINE.

PARTICULLAR AMOUNT $ SALES (50000 * $100) 5000000 LESS VARIABLE COST (50000 * $85) -4250000 CONTRIBUTION MARGIN 750000 LESS FIXED COST -275000 NET INCOME 475000

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