Reference no: EM132632153

SPECIAL ORDER

Mobile solution company produces a variety of electric scooter. Management follows a pricing policy of manufacturing cost plus 60 percent. In response to a request from Northern cycles, LLC, the following price has been developed for an order of 300 scooters(the smallest scooter Mobile solution produces)

Manufacturing costs.

Direct materials.........................................................................................................$ 12,000

Direct labor.................................................................................................................$15,000

Factory overhead.......................................................................................................$18,000

Total.............................................................................................................................45,000

Markup(60%)..............................................................................................................27,000

Selling price..............................................................................................................$72,000

Northern cycle rejected this price and offered to purchase the 300 scooter at a price of $60,000. The following additional information is available:

1. Mobile solution has sufficient excess capacity to produce the scooters
2. Factory overhead is applied on the basis of direct labor dollars.
3. Budget factory overhead is $400,000 for the current year. of this amount,$1000,000 is fixed.of the $18,000 of factory overhead assigned to the Northern cycle order,only $13,500 is driven by the special order:$400 is a fixed cost.ed as follows:

Selling and administrative expenses are budget as follows:

Fixed.................................................................................................$ 90,000 per year

Variable.............................................................................................$ 20 per unit manufactured ans sold

Required

Question a. The president of mobile solution want to know Northern cycles to have the scooter for $60,000. determines the effect on profit of accepting Northern cycles"s offer.

Question b. Briefly explain why certain cost should be omitted from the analysis in requirement (a).

Question c. Assume Mobile solution is operating at capacity and could sell the 300 scooter at its regular markup.

1. Determine the opportunity cost of accepting Northern Cycle"s offer.

2. Determine the effect on profit of accepting Northern Cycle"s offer.

Question d. What other factors should Mobile Solution consider before deciding to accept the special order?