Contribution Income Statement and Operating Leverage (LO3, 5)

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 $80 per crate, and fixed costs are $275,000 per year. In the year 2012, Florida Berry Basket sold 45,000 crates.

Required :

a. Prepare a contribution income statement for the year ended December 31, 2012.

b. Determine the company’s 2012 operating leverage.

87

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.
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