question archive Semester Case – Cowboy Ice Cream, Inc
Semester Case – Cowboy Ice Cream, Inc
Subject:BusinessPrice: Bought3
Semester Case – Cowboy Ice Cream, Inc.
Before purchasing the new ice cream truck, Cowboy Ice Cream, Inc. (CIC) considered eliminating the Retail Division. This was mainly prompted by Frank’s (W.T. fellow shareholder) concern that the income statements for the divisions for May-September 2017 (when the Retail Division is at full operation) imply that profitability could be improved if the Retail Division were eliminated.
Division
Retail
Wholesale
Sales
$60,000
$160,000
Cost of goods sold
(18,000)
(90,000)
Variable operating expenses required to operate each division
(31,500)
(15,050)
Contribution margin
10,500
54,950
General fixed operating expenses
(allocation of general administrative expense)
(12,000)
(12,000)
Net income
$ (1,500)
$ 42,950
Required:
a. Explain the effect on profitability if the Retail Division is eliminated.
Relevant Revenue and Costs for the Retail Division:
b. Prepare comparative income statements of the company as a whole under two alternatives: (1) the retention of the Retail Division and (2) the elimination of the Retail Division.
Decision
Keep Retail Div.
Eliminate Retail Div.
Sales
Cost of goods sold
Operating expenses
Contribution margin
General fixed operating expenses
Net income
According to its original plan, CIC plans to charge its wholesale customers at $8 per unit. W.T. expects sales to reach 34,000 units at that rate. His co-shareholder, Frank, however, argues that actual results may range from 30,000 units to 40,000 units because of market uncertainty. CIC’s standard variable cost for the Wholesale Division is $5.25 per unit, and its standard fixed cost is $1,100.
Required:
Develop budgets based on the assumptions of service levels at 30,000 units, 34,000 units, and 40,000 units.
Flexible Budget
30,000 Units
Flexible Budget
34,000 Units
Flexible Budget
40,000 Units
Sales ($8/unit)
Variable costs ($5.25/unit.)
Contribution margin
Fixed costs
Net income
E13-14
Buckley Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.
Segment
A
B
C
Sales
$330,000
$480,000
$500,000
Cost of goods sold
(242,000)
(184,000)
(190,000)
Sales commissions
(30,000)
(44,000)
(44,000)
Contribution margin
58,000
252,000
266,000
General fixed operating expenses (allocation of president’s salary)
(92,000)
(92,000)
(92,000)
Advertising expense
(specific to individual divisions)
(6,000)
(20,000)
0
Net income
$(40,000)
$140,000
$174,000
Required:
a. Explain the effect on profitability if Segment A is eliminated.
b. Prepare comparative income statement for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A
