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 $90 per crate, variable costs are $70 per crate, and fixed costs are $278,000 per year. In the year 2008, Florida Berry Basket sold 43,000 crates.

(a) Prepare a contribution income statement for the year ended December 31, 2008.

(b) Determine the company's 2008 operating leverage.

(c) Calculate the percentage change in profits if sales decrease by 10 percent.

(d) Management is considering the purchase of several berry-picking machines. This will increase annual fixed costs to $378,000 and reduce variable costs to $67.50 per crate. Calculate the effect of this acquisition on operating leverage and explain any change.