Capital Tours Limited sells weekend tours of London for £200 per person. Last month 1,000 tours were sold and costs were £180,000 (representing a total cost per tour of £180). These costs included £60,000 which were fixed costs. A local college wishing to send 200 students on an educational trip has offered Capital Tours £140 per tour.

Required

(a). Explain with reasons whether Capital Tours should accept the offer.

(b). Explain the danger, in the long run, of Capital Tours using prices based on variable (marginal) costing.