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.

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.)

(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.)

Answer 1

• All working forms part of the answer
• Answer ‘a’

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

• Answer ‘b’

Contribution margin	$1350000
Net income	$1079000
Degree of operating leverage	1.25

• Answer ‘c’

Sales Decrease %	10%
Degree of operating leverage	1.25
% change in profits will be [10% x 1.25]	12.50% decrease

• Answer ‘d’

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.