Assume that Cold Rock sells ice cream for $4.10 per gallon. The cost of each gal

Question

Assume that Cold Rock sells ice cream for $4.10 per gallon. The cost of each gallon follows:

One of Cold Rock's regular customers asked the company to fill a special order of 600 gallons at a selling price of $2.85 per gallon for a fund-raising picnic for a local charity. Cold Rock has capacity to fill it without affecting total fixed costs for the month. Cold Rock's general manager was concerned about selling the ice cream below the cost of $3.35 per gallon and has asked for your advice.

Prepare a schedule to show the impact on Cold Rock's profits of providing 600 gallons of ice cream in addition to the regular production and sales of 18,200 gallons per month.

Materials $ 1.10   Labor .50   Variable overhead .50   Fixed overhead ($22,750 per month, 18,200 gallons per month) 1.25   Total cost per gallon $ 3.35

Explanation / Answer

SInce there is no chage in fixed cost for accepting this new order, what should be consider for evaluating the proposal is the marginal costing or variable cost of manufacturing the special order and whether it generates positive contribution.

Variable cost of each gallon = $2.10 and selling price of special order is $ 2.85 per gallon.

Contribution per gallon is $0.75

Total extra profit for producing extra 600 gallon is $0.75 * 600 = $450.

For existing 18,200 gallon production, the contribution is $0.75 * 18,200 = $13,650

Normal Profit = $13,650 - Fixed Cost ($22,750) = (-) $9,100

Total loss = (-)9,100 + $450 = $8,650

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