Margot
’
s Ice Cream operates several stores in a major metropolitan city and its suburbs. Its budget and operating data for the current year follow: Flavor Gallons Selling Price per Gallon Variable C

Question

Margot
’
s Ice Cream operates several stores in a major metropolitan city and its suburbs. Its budget and operating data for the current year follow: Flavor Gallons Selling Price per Gallon Variable Costs per Gallon Gallons Selling Price per Gallon Variable Costs per Gallon Vanilla 
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 ﻿Chocolate 
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2
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 ﻿Strawberry 
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 ﻿Required
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1
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 ﻿For each product determine the following variances in the contribution margins and specify if the variance is F or U: a
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 ﻿Sales volume b
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 ﻿Sales mix c
)
 ﻿Sales quantity 
(
4
 ﻿Marks each
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2
.
 ﻿Assess the sales in the current year based on your analyses.

VIPSolutions · Accepted Answer

# Margot’s Cream: Contribution Margin Variance Analysis

## 1. Contribution Margin Variances

first organize the data:

| Flavor     | Budgeted Gallons | Budgeted Price | Budgeted VC | Actual Gallons | Actual Price | Actual VC |
|------------|------------------|----------------|-------------|---------------|--------------|-----------|
| Vanilla    | 240,000          | $1.25          | $.55       | 180,000       | $1.10        | $.45     |
| Chocolate  | 300,000          | $1.50          | $.60       | 270,000       | $1.35        | $.50     |
| Strawberry | 200,000          | $1.80          | $.70       | 330,000       | $2.00        | $.75     |
| **Total**  | 740,000          |                |             | 780,000       |              |           |

### Step 1: Calculate Contribution Margin per Gallon

- **Vanilla:**  
  - Budgeted: $1.25 - $.55 = **$.70**  
  - Actual: $1.10 - $.45 = **$.65**
- **Chocolate:**  
  - Budgeted: $1.50 - $.60 = **$.90**  
  - Actual: $1.35 - $.50 = **$.85**
- **Strawberry:**  
  - Budgeted: $1.80 - $.70 = **$1.10**  
  - Actual: $2.00 - $.75 = **$1.25**

### Step 2: Calculate Total Contribution Margins

- **Budgeted CM:**  
  - Vanilla: 240,000 × $.70 = $168,000  
  - Chocolate: 300,000 × $.90 = $270,000  
  - Strawberry: 200,000 × $1.10 = $220,000  
  - **Total:** $168,000 + $270,000 + $220,000 = **$658,000**

- **Actual CM:**  
  - Vanilla: 180,000 × $.65 = $117,000  
  - Chocolate: 270,000 × $.85 = $229,500  
  - Strawberry: 330,000 × $1.25 = $412,500  
  - **Total:** $117,000 + $229,500 + $412,500 = **$759,000**

---

## a) Sales Volume Variance (Contribution Margin)

**Formula:**  
Sales Volume Variance = (Actual Total Sales Volume - Budgeted Total Sales Volume) × Budgeted Average CM per Gallon

- Budgeted total gallons: **740,000**
- Actual total gallons: **780,000**
- Budgeted average CM per gallon: $658,000 / 740,000 ≈ **$.89**

**Calculation:**  
(780,000 - 740,000) × $.89 = 40,000 × $.89 = **$35,600 F**

- **Favorable (F):** Because actual sales volume exceeded budgeted sales volume.

---

## b) Sales Mix Variance (Contribution Margin)

**Formula:**  
Sales Mix Variance = (Actual Mix % – Budgeted Mix %) × Actual Total Sales Volume × Budgeted CM per Gallon

### 1. Compute Mix Percentages
- **Budgeted Mix:**  
  - Vanilla: 240,000 / 740,000 ≈ 32.43%  
  - Chocolate: 300,000 / 740,000 ≈ 40.54%  
  - Strawberry: 200,000 / 740,000 ≈ 27.03%
- **Actual Mix:**  
  - Vanilla: 180,000 / 780,000 ≈ 23.08%  
  - Chocolate: 270,000 / 780,000 ≈ 34.62%  
  - Strawberry: 330,000 / 780,000 ≈ 42.31%

### 2. Budgeted CM per Gallon (for Mix Variance)
- Vanilla: $.70  
- Chocolate: $.90  
- Strawberry: $1.10

### 3. Mix Variance per Flavor

- **Vanilla:**  
  (23.08% - 32.43%) × 780,000 × $.70  
  = (-9.35%) × 780,000 × $.70  
  = (-72,930) × $.70 = **-$51,051 U**

- **Chocolate:**  
  (34.62% - 40.54%) × 780,000 × $.90  
  = (-5.92%) × 780,000 × $.90  
  = (-46,176) × $.90 = **-$41,558 U**

- **Strawberry:**  
  (42.31% - 27.03%) × 780,000 × $1.10  
  = (15.28%) × 780,000 × $1.10  
  = 119,184 × $1.10 = **$131,102 F**

- **Total Mix Variance:**  
  = -$51,051 + (-$41,558) + $131,102 = **$38,493 F**

---

## c) Sales Quantity Variance (Contribution Margin)

**Formula:**  
Sales Quantity Variance = (Actual Total Sales Volume - Budgeted Total Sales Volume) × Weighted Avg Budgeted CM per Gallon

- Already calculated above under (a):  
  = (780,000 - 740,000) × $.89 = **$35,600 F**

---

## Variance Summary Table

| Variance Type   | Value      | F/U    |
|-----------------|------------|--------|
| Sales Volume    | $35,600    | F      |
| Sales Mix       | $38,493    | F      |
| Sales Quantity  | $35,600    | F      |

---

# 2. Assessment of Current Year Sales

- **Sales Volume:**  
  The company sold 40,000 more gallons than budgeted, resulting in a favorable sales volume variance.

- **Sales Mix:**  
  The actual sales mix shifted toward Strawberry, which has the highest contribution margin per gallon. This shift resulted in a favorable sales mix variance.

- **Overall Effect:**  
  All variances are favorable, meaning the company increased both total contribution margin and profitability, primarily due to higher sales and a more profitable sales mix (more Strawberry sold).

- **Current Year Outcome:**  
  Margot's Ice Cream exceeded budgeted contribution margin by $101,000 ($759,000 actual vs. $658,000 budget). The variances show that both higher sales volume and a better product mix contributed to this success.

---

## Conclusion

Margot’s Ice Cream performed better than planned in terms of both sales volume and mix, with a substantial positive impact on contribution margin and likely profit.

---

**Note:**  
- F = Favorable, U = Unfavorable  
- All calculations use provided budget and actual data.  
- [No images were provided.]

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