Contribution Income Statement and Operating Leverage

Willamette Valley Fruit Company started as a small cannery-style operation in 1999. The company

now processes, on average, 20 million pounds of berries each year. Flash-frozen berries are sold in 30

pound packs to retailers. Assume 650,000 packs were sold for $75 each last year. Variable costs were

$42 per pack and fixed costs totaled $14,250,000.

Required

a. Prepare a contribution income statement for last year.

b. Determine last year's operating leverage.

c. Calculate the percentage change in profits if sales decrease by 10%.

d. Management is considering the purchase of several new pieces of packaging equipment. This will

increase annual fixed costs to $15,500,000 and reduce variable costs to $40 per crate. Calculate the

effect of this acquisition on operating leverage and explain any change.