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 $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.

Answer 1

Calculation of Income statement -

	Florida Berry basket
	Income statement
	For the year ended Dec. 31, 2008
	Sales (49000*110)	5390000
less	variable cost (90*49000)	4410000
	Contribution margin	980000
less	Fixed cost	272000
	Net income	708000

(b) Operating leverage = Contribution / EBIT

= 980000/708000

= 1.38

(c) Calculation of % change in profits if the sales is decrease by 10% -

	Particulars	Amt$
	Sales (49000*90%*110)	4851000
less	variable cost (90*49000*90%)	3969000
	Contribution margin	882000
less	Fixed cost	272000
	Net income	610000

when sales is reduce by 10 % then the profit is reduce by = 708000 - 610000 = 98000

% change in profit = 98000 / 708000 = 13.84%

(d) calcualtion of operating leverage when co. purcahsed several berry picking machine -

	Particulars	Amt.$
	Sales (49000*110)	5390000
less	variable cost (87.5*49000)	4287500
	Contribution margin	1102500
less	Fixed cost	372000
	Net income	730500

operating leverage = contributin/EBIT

= 1102500/730500

= 1.51

by purchasing of picking berry machines it will increase operating leverage as the fixed has been increasing due to this and increased net income also

the correct option would be option (b) the acquisition of berry picking machine will decrese variable costs thereby increasing the contributuin 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.

Please comment in case of further clarification required.