Assume that Cold Rock sells ice cream for $4.80 per gallon. The cost of each gallon follows:
Materials....$1.80
Labor....$ .60
Variable overhead....$ .30
Fixed Overhead ($24,000 per month, 20,000 gallons per month)....$1.20
Total costs per gallon.....$3.90
One of Cold Rock's regular customers asked the company to fill a special order of 400 gallons at a selling price of $3.60 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 $3.90 per gallon and has asked for your advice.
a. Prepare a schedule to show the impact on Cold Rock's profits of providing 400 gallons of ice cream in addition to the regular production and sales of 20,000 gallons per month.
b. Based solely on the data given, what is the lowest price per gallon at which the ice cream in teh special order could be sold without reducing Cold Rock's profts?
c. What other factors might the general manager want to consider in setting a price fo the special order?