California Creamery, Inc. (CCI) owned and operated 14 retail ice cream stores spread throughout Southern California, from San Luis Obispo to San Diego. CCI's stores sold only the highest-quality, ultra-premium ice cream. They offered 25 different ice cream flavors. Many of the CCI flavors were "exotic," such as "Polynesian Fantasy," "Mango-Lemon Supreme," and "Multi-Nut Twist." But CCI also sold a few traditional ice cream flavors, such as vanilla, chocolate, straw-berry, and coffee. Some of the flavors were very popular, but a few of the exotic flavors sold in low volumes.

Questions
1. Compute the full production cost (per gallon) of the Polynesian fantasy and Vanilla products using
a. Will's old costing method.
b. The new costing method (Louise's suggestion).
2. What are the effects, if any, of changing the company's costing method? Specifically, are the differences between the two costing methods material in terms of:
a. Their effect on individual product costs?
b. Their effect on total company profits? (Assume no changes in any operating decisions, such as prices and production volumes.)
If there are material differences, why do they exist? If there are no material differences, why do they not exist?
3. What should Will do now? Explain.

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EXHIBIT 1 CALIFORNIA CREAMERY, INC. 2004 Budgeted Manufacturing Overhead Costs Driver" of the Activity's Costs Budgeted Activity Level for the Cost Driver Budgeted Cost (5000) 5 80 95 122 175 110 18 Activity Purchasing Material handling Blending Freezing Packaging Quality control Total manufacturing overhead costs Purchase orders Setups Blender hours Freezer hours Packaging machine hours Batches 909 1,846 1,000 1,936 1,100 286 5600 EXHIBIT 2 CALIFORNIA CREAMERY, INC. Two Product Examples (2004 Data) Polynesian Fantasy Vanilla Direct material Direct labor Budgeted production and sales Batch size Setups Purchase order size Blender time Freezer time Packaging machine time $2.00/gallon 1.20/gallon 2,000 gallons 100 gallons 3 per batch 50 gallons 0.6 hour per 100 gallons 1.0 hour per 100 gallons 0.3 hour per 100 gallons $1.80/gallon 1.20/gallon 100,000 gallons 2,500 gallons 3 per batch 1,000 gallons 0.3 hour per 100 gallons 1.0 hour per 100 gallons 0.2 hour per 100 gallons