Assume that Cold Rock sells ice cream for $4.80 per gallon. The cost of each gallon follows: Materials . . . . . . . . . . . . .$1.80 Labor. . . . . . . . . . . . . . 0.60 Variable overhead . . . . . . . . . . . . . .0.30 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 fi ll 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 fi ll it without affecting total fi xed 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. Required a. Prepare a schedule to show the impact on Cold Rock’s profi ts 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 the special order could be sold without reducing Cold Rock’s profi ts? c. What other factors might the general manager want to consider in setting a price for the special order?
Assume that Cold Rock sells ice cream for $4.80 per gallon. The cost of each gallon follows: Materials . . . . . . . . . . . . .$1.80 Labor. . . . . . . . . . . . . . 0.60 Variable overhead . . . . . . . . . . . . . .0.30 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 fi ll 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 fi ll it without affecting total fi xed 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. Required a. Prepare a schedule to show the impact on Cold Rock’s profi ts 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 the special order could be sold without reducing Cold Rock’s profi ts? c. What other factors might the general manager want to consider in setting a price for the special order?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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Question
Assume that Cold Rock sells ice cream for $4.80 per gallon. The cost of each gallon follows:
Materials . . . . . . . . . . . . .$1.80
Labor. . . . . . . . . . . . . . 0.60
Variable overhead . . . . . . . . . . . . . .0.30
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 fi ll 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 fi ll it without affecting total fi xed 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.
Required
a. Prepare a schedule to show the impact on Cold Rock’s profi ts 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 the special order could be sold without reducing Cold Rock’s profi ts?
c. What other factors might the general manager want to consider in setting a price for the
special order?
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