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Semester Case – Cowboy Ice Cream, Inc.

CIC had budgeted its Wholesale Division sales at $8 per unit. CIC planned to sell 4,000 units of ice cream to retail customers during May 2018. But, by lowering the sales price to $7.50 per unit, the company was able to increase the actual number of units sold to 4,500.


a. Determine the sales volume variance and indicate whether it is favorable (F) or unfavorable (U).


Master   Budget

4,000   Units

Flexible   Budget

4,500   Units

Volume   Variance


Sales ($8 per unit)

b. Determine the flexible budget variance, and indicate whether it is favorable (F) or unfavorable (U).


Flexible   Budget

4,500   Units

Actual   Revenue

4,500   Units

Flexible   Budget Variance



c. Did lowering the price per unit increase profit? Explain.


W.T. is considering changing the pricing strategy for the Retail Division, butwonders about the potential effects on the firm’s net income if he changes the price per bar that the firm charges its customers. For June, he plans to only operate the truck for the standard 40 operating hours that he also used in May. This means that many of the operating costs are in effect fixed. The following basic data pertain to June 2018:


Variable costs (per bar):


Manufacturing and storage cost per ice   cream bar 



Cost of paper goods per bar



Expected fixed costs   (total for the month):


Labor cost



Depreciation on truck



Gas for truck



General and administrative costs


Required (round all computations to the nearest whole dollar):

a. Prepare the pro forma income statement that would appears in the master budget if the firm expects to sell 5,000 bars in June at $4.00 per bar.

b. A marketing consultant suggests to W.T. that the retail price may affect the number of bars the firm sells. According to the consultant’s analysis, if CIC charges customers $3.75 per bar, the firm can sell 5,750 bars. Prepare a flexible budget using the consultant’s assumption.

c. The same consultant also suggests that if the firm raises its rate to $4.25 per bar, the number of bars sold will decline to 4,500. Prepare a flexible budget using the new assumption.


Standard   Costs





Master   Budget


5,000   bars

Flexible   Budget


5,750   bars

Flexible   Budget


4,500   bars


Sales Revenue


Variable costs:


Mfg and storage



Paper goods



Contribution margin


Fixed costs:








Gas for truck



General and Admin.



Net income

d. Evaluate the three possible outcomes you determined in Requirements a, b, and c and recommend a pricing strategy.


Compute variances for the following items and indicate whether each variance is favorable (F) or unfavorable (U)






Favorable (F) or Unfavorable (U)


Sales price




Sales   revenue




Cost of   goods sold




Material   purchases at 5,000 pounds




Materials   usage




Production   volume

950 units

900 units


Wages at   4,000 hours




Labor usage   at $12 per hour




Research and   development expense




Selling and   administrative expenses




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