Information:

A new customer has offered to purchase 6 million litres of ice-cream at $1.75 per litre.

Factory capacity is 20 million 1-litre units; current production is 16 million units.

The company cannot sell to all the usual customers and also accept this order.

As a result, Cool-Treats must consider the following options:

1. Refuse the offer from the new customer.
2. Accept the offer and deny sales to some existing customers.
3. Accept the offer and temporarily increase capacity at a cost of $500,000 to meet the order without impacting sales to existing customers.

Information Continued:

1. What are the relevant costs and benefits of the three alternatives?
2. By how much will operating income increase or decrease if the order is accepted?

	Total	Unit Cost
Variable costs:
Ingredients	$15,200	$0.950
Packaging	3,200	0.200
Direct labour	4,000	0.250
Variable overhead	1,280	0.080
Selling commission	320	0.020
Total variable costs	24,000	1.500
Total fixed costs	1,552	0.097
Total costs	$25,552	$1.597
Selling price		$ 2.00