Gourmet Ice Cream Company has idle capacity. It only operates at 80 percent capa

Question

Gourmet Ice Cream Company has idle capacity. It only operates at 80 percent capacity right now. The company can produce up to 20 million gallon units. The company produces only gourmet ice cream. The total costs associated with the current production and sales are shown below (in thousands of dollars). An ice cream distributor not normally served has offered to buy 2 million units at $2.80 per gallon under its own label. The distributor has also agreed to pay the transportation costs. Since the distributor approached the company directly, there is no sales commission.
Revenues $57,600 Variable costs Dairy ingredients 20,160 Fruit, chocolate, mint, etc. 2,880 Sugar 4,320 Direct labor 7,200 Containers 5,760 Sales commissions 576 Distribution 864 Miscellaneous 1,440 Total Variable costs $43,200 Fixed costs Salaries 1,050 Depreciation 360 Utilities 100 Taxes 40 Other 180 Total fixed costs 1,730 Operating income $12,670 Hint: Don’t forget that the income statement is based on the actual units sold. Required: Computations (use Excel). Show the additional profit or loss that would be generated by the special order. What is the minimum profit Gourmet Ice Cream Company should accept? Show the computations, but respond in the memo. Gourmet Ice Cream Company has idle capacity. It only operates at 80 percent capacity right now. The company can produce up to 20 million gallon units. The company produces only gourmet ice cream. The total costs associated with the current production and sales are shown below (in thousands of dollars). An ice cream distributor not normally served has offered to buy 2 million units at $2.80 per gallon under its own label. The distributor has also agreed to pay the transportation costs. Since the distributor approached the company directly, there is no sales commission.
Revenues $57,600 Variable costs Dairy ingredients 20,160 Fruit, chocolate, mint, etc. 2,880 Sugar 4,320 Direct labor 7,200 Containers 5,760 Sales commissions 576 Distribution 864 Miscellaneous 1,440 Total Variable costs $43,200 Fixed costs Salaries 1,050 Depreciation 360 Utilities 100 Taxes 40 Other 180 Total fixed costs 1,730 Operating income $12,670 Hint: Don’t forget that the income statement is based on the actual units sold. Required: Computations (use Excel). Show the additional profit or loss that would be generated by the special order. What is the minimum profit Gourmet Ice Cream Company should accept? Show the computations, but respond in the memo. Revenues $57,600 Variable costs Dairy ingredients 20,160 Fruit, chocolate, mint, etc. 2,880 Sugar 4,320 Direct labor 7,200 Containers 5,760 Sales commissions 576 Distribution 864 Miscellaneous 1,440 Total Variable costs $43,200 Fixed costs Salaries 1,050 Depreciation 360 Utilities 100 Taxes 40 Other 180 Total fixed costs 1,730 Operating income $12,670 Hint: Don’t forget that the income statement is based on the actual units sold. Required: Computations (use Excel). Show the additional profit or loss that would be generated by the special order. What is the minimum profit Gourmet Ice Cream Company should accept? Show the computations, but respond in the memo.

Explanation / Answer

Revenues

57600

Dairy ingredients

20160

Fruit, chocolate, mint, etc.

2880

Sugar

4320

Direct labor

7200

Containers

5760

Sales commissions

576

Distribution

864

Miscellaneous

1440

Total Variable costs

Salaries

1050

Depreciation

360

Utilities

100

Taxes

40

Other

180

Total fixed costs

Operating income

Dairy ingredients

Fruit, chocolate, mint, etc.

Sugar

Direct labor

Containers

Sales commissions

Distribution

Miscellaneous

Total Variable costs

Gourmet Ice Cream Company Income statement $ in ('000') Existing in Millions Special in Millions Capacity 80% Additional 2 units Per Million 16 2

Revenues

3600

57600

5600 Less : Variable cost

Dairy ingredients

1260

20160

2520

Fruit, chocolate, mint, etc.

180

2880

360

Sugar

270

4320

540

Direct labor

450

7200

900

Containers

360

5760

720

Sales commissions

36

576

0

Distribution

54

864

0

Miscellaneous

90

1440

180

Total Variable costs

2700 43200 5220 Contribution Margin 900 14400 380 Less : Fixed Costs

Salaries

1050

0

Depreciation

360

0

Utilities

100

0

Taxes

40

0

Other

180

0

Total fixed costs

1730 0

Operating income

12670 380 Requirement 1 Additional Profit of $380000 will be generated by the special order Requirement 2 Minimum price that Company should accept is anything greater than its variable cost which is $2610 per million galons in this case calculated as follows. Because our all fixed costs are already absorbed by existing orders. So anything which is above the variable cost will be our profit.

Dairy ingredients

1260

Fruit, chocolate, mint, etc.

180

Sugar

270

Direct labor

450

Containers

360

Sales commissions

0

Distribution

0

Miscellaneous

90

Total Variable costs

2610

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