Big Dan sells ice cream for $3 per quart. Following is the cost associated with producing each quart:
Materials $1.00
Labor .50
Variable overhead .25
Fixed overhead ($20,000/month, 20,000 quarts/month) 1.00
Total cost per quart $2.75
A regular customer has asked Big Dan to fill a special order of 400 quarts at a selling price of $2.50 per quart for a special picnic. Big Dan can fill the order using existing capacity without affecting total fixed cost per month. The manager of Big Dan is concerned about selling the special order of ice cream below the cost of $2.75 per quart and has approached you for advice.
Question: How will the impact of producing the special order of 400 quarts of ice cream in addition to the regular production of 20,000 quarts of ice cream affect operating profit?