Problem:
XYZ 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 XYZ Ice Cream Company should accept? Show the computations, but respond in the memo.
Memo (use Word).
1. As the manger of the ice cream company, would you accept this order or reject it?
2. What is the minimum price you would accept?
Refer to your analysis in your response. Write a memo to the owner of the business. Start with an introduction and end with a recommendation.