The purpose of this memorandum is to clarify the potential profitability of the special-order proposal for the Gourmet Ice Cream Company. The items discussed will include the explanation of the decision to reject or accept the special-order offer made to the company. Furthermore, this report will reveal the minimum offer the company can accept to remain profitable. All financial figures and estimations will be reflected on the attached Excel spreadsheet.
Background and Feasibility of the Order The company is currently producing 16 million units of ice cream, leaving an idle capacity of 20%. Another company has come forward requesting we produce 2 million units for them at $2.80. This request only utilizes an additional 10% of the company’s …show more content…
To quantify this, the Excel spreadsheet shows that the move to accept the offer will produce a profit for the company. Furthermore, having this offer will move the production line closer to maximum capacity. Along with this offer, the company still has a remainder of 2 million units of production still at idle capacity, this will allow the company to consider future offers to increase the profit margin even higher. The one downside to consider during this venture, is that the contracted company offering the special order will be labeling the product under their own brand name. This would introduce a new competitor to the market, thus increasing the possibility of the market becoming flooded with similar quality product labeled under two different …show more content…
The company’s financial departments considerations will depend on how much profit or loss the company will endure if the order is accepted. The offer should only be accepted if the orders produced revenue surpasses the production cost, the profit margin is acceptable, and if present production/sales will not be affected. The first step in justifying the special order, a firm must have the capacity to fulfill the order. Having excess production capacity will ensure the regular production line will go unaffected, particularly the equipment and employees working the orders. This can be problematic if the company is operating at 100% capacity, predominantly the regular customers who already purchased the product at regular production rates. These disruptions can potentially lead to dissatisfied existing customers, careful consideration must be made when accepting additional orders to protect present and upcoming customers ("Special order decisions," n.d.). The only justification for a production interruption is if the special-order profit far exceeds the profitability of normal operations. The special-order pricing is the most justifiable part of the acceptance process. The standard practice to pricing the order is settling on a production price below regular price all the while the order is still generating revenue above variable costs. When
Background and Feasibility of the Order The company is currently producing 16 million units of ice cream, leaving an idle capacity of 20%. Another company has come forward requesting we produce 2 million units for them at $2.80. This request only utilizes an additional 10% of the company’s …show more content…
To quantify this, the Excel spreadsheet shows that the move to accept the offer will produce a profit for the company. Furthermore, having this offer will move the production line closer to maximum capacity. Along with this offer, the company still has a remainder of 2 million units of production still at idle capacity, this will allow the company to consider future offers to increase the profit margin even higher. The one downside to consider during this venture, is that the contracted company offering the special order will be labeling the product under their own brand name. This would introduce a new competitor to the market, thus increasing the possibility of the market becoming flooded with similar quality product labeled under two different …show more content…
The company’s financial departments considerations will depend on how much profit or loss the company will endure if the order is accepted. The offer should only be accepted if the orders produced revenue surpasses the production cost, the profit margin is acceptable, and if present production/sales will not be affected. The first step in justifying the special order, a firm must have the capacity to fulfill the order. Having excess production capacity will ensure the regular production line will go unaffected, particularly the equipment and employees working the orders. This can be problematic if the company is operating at 100% capacity, predominantly the regular customers who already purchased the product at regular production rates. These disruptions can potentially lead to dissatisfied existing customers, careful consideration must be made when accepting additional orders to protect present and upcoming customers ("Special order decisions," n.d.). The only justification for a production interruption is if the special-order profit far exceeds the profitability of normal operations. The special-order pricing is the most justifiable part of the acceptance process. The standard practice to pricing the order is settling on a production price below regular price all the while the order is still generating revenue above variable costs. When