Question

Contribution Income Statement and Operating Leverage
Stateline Berry Farm harvests early-season blueberries for shipment throughout Michigan and Illinois in July. The strawberry farm is maintained by a permanent staff of 10 employees and seasonal workers who pick and pack the blueberries. The blueberries are sold in crates containing 100 individually packaged one-quart containers. Affixed to each one-quart container is the distinctive Stateline Berry Farm logo inviting buyers to "Enjoy the berry best blueberries in the world!" The selling price is $90 per crate, variable costs are $80 per crate, and fixed costs are $280,000 per year. In the year 2017, Stateline Berry Farm sold 50,000 crates.

(a) Prepare a contribution income statement for the year ended December 31, 2017. HINT: Use a negative sign with both "costs" answers.

STATELINE BERRY FARM Contribution Income Statement For the Year Ended December 31, 2017
Sales	Answer
Variable costs	Answer
Contribution margin	Answer
Fixed costs	Answer
Net income	Answer

(b) Determine the company's 2017 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 $77.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change. (Round your answers two decimal places.)
Answer

Multiple Choice:

a.The acquisition of the berry-picking machines will reduce 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.

b.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.

c.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.

d.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.

Answer 1