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 $70 per crate, and fixed costs are $271,000 per year. In the year 2008, Florida Berry Basket sold 45,000 crates.

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

(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.)
Answer

% decrease

(d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $371,000 and reduce variable costs to $67.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answer to two decimal places.)

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

Explanation / Answer

Answer

FLORIDA BERRY BASKET

Income Statement

For the Year Ended December 31, 2008

Sales

$4500000

Variable costs

-3150000

Contribution margin

$1350000

Fixed costs

-271000

Net income

$1,079,000

Contribution margin

$1350000

Net income

$1079000

Degree of operating leverage

1.25

Sales Decrease %

10%

Degree of operating leverage

1.25

% change in profits will be [10% x 1.25]

12.50% decrease

New Income statement would look like:

Income Statement

For the Year Ended December 31, 2008

Sales

4500000

Variable costs

-3037500

Contribution margin

1462500

Fixed costs

-371000

Net income

$1,091,500

Contribution margin

$1462500

Net income

$1091500

Degree of operating leverage

1.34

Net Income will increase from what it used to be.

FLORIDA BERRY BASKET

Income Statement

For the Year Ended December 31, 2008

Sales

$4500000

Variable costs

-3150000

Contribution margin

$1350000

Fixed costs

-271000

Net income

$1,079,000

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