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