Lion’s Lager Case Study
Part C: Cost-Volume-Profit and Variance Analysis
Case Facts
Target Profit Units
Following the successful launch of Lions Lager’s limited-edition seasonal beer, “Autumn
Amber,” on August 1, the company is aiming to maximize profitability during its short sales
window. They previously anticipated limiting the seasonal beer to 10,000 units, but believe there
is market demand for additional units. Management has set an ambitious target of achieving
operating income of $150,000 from the sale of the seasonal beer. Management believes this is a
realistic goal, particularly after the outcome of the overhead allocation analysis led to more
precise product costing through the utilization of the activity based costing system.
As a result of the sale price analysis conducted, management made the decision to reduce the
sales price of each bottle to $9.80 to increase pricing competitiveness in the market while still
maintaining a generous 70% gross profit margin. The cost management team has also already
conducted a cost behavior analysis for the budgeted costs of Autumn Amber for more accurate
analysis. The results of this analysis are summarized in Table I below:
Table I: Autumn Amber Cost
Behavior
Unit variable cost $ 3.72
Total fixed costs $ 20,000.00
Management wants to know how many units would need to be sold in order to meet their
ambitious operating income goal of $150,000.
Variance Analysis
Of particular concern in achieving the desired profitability is the direct materials cost, as Autumn
Amber relies on specially sourced ingredients. The budgeted and actual costs of direct materials
for the month of August are summarized in Table II:
Table II: Direct Materials Costs for August
Description Estimated Actual
Quantity 9,320 10,200
Unit variable cost $ 1.20 $ 1.60
Total fixed cost $ 3,000 $ 2,800
Preliminary conversations with production managers have revealed that the current direct
materials supplier provides the highest quality materials, which is the source of the unique and
bold flavor of the beer.
Management wants to investigate the direct materials variances for the month of August to
determine if there are any improvements or recommendations to be made. They have established
a 5% or more departure from the budgeted costs to be material to them.
Instructions
Your cost management team is tasked with conducting the following analysis:
How many units must be sold in order to meet management’s target profit of $150,000?
What is the quantitative and qualitative budget variance analysis for the August direct
materials cost? Please ensure you provide and discuss the quantity, price, and total budget
variances.
Please ensure all calculations are performed in Excel, and all findings, analysis, and
recommendations are professionally summarized in a corresponding report. Please adhere to
generally accepted professional business writing parameters.
You are permitted to utilize AI resources for the completion of this case study, but that process
(prompts and the responses) must be well documented and submitted with your report
deliverables. Your groups not permitted to collaborate or share findings among other groups.
Doing so is academically dishonest, and will result in a 0% on the assignment for all students
involved. You are permitted and encouraged to seek assistance from your instructor.