Cruise Company produces a variety of electric scooters. Management follows a pricing policy of manufacturing cost plus 60 percent. In response to a request from Pulse Cycles, LLC, the following price has been developed for an order of 300 scooters (the smallest scooter Cruise produces):

Pulse Cycles rejected this price and offered to purchase the 300 scooters at a price of \($120,000\). The following additional information is available:
¢ Cruise has sufficient excess capacity to produce the scooters.
* Factory overhead is applied on the basis of direct labor dollars.
* Budgeted factory overhead is \($800,000\) for the current year. Of this amount, \($200,000\) is fixed. Of the \($36,000\) of factory overhead assigned to the Pulse Cycles order, only \($27,000\) is driven by the special order; \($9,000\) is a fixed cost.
¢ Selling and administrative expenses are budgeted as follows:

Required

a. The president of Cruise wants to know if he should allow Pulse Cycles to have the scooters for \($120,000\). Determine the effect on profits of accepting Pulse Cycles’ offer.

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

c. Assume Cruise is operating at capacity and could sell the 300 scooters at its regular markup.
1. Determine the opportunity cost of accepting Pulse Cycles’ offer.
2. Determine the effect on profits of accepting Pulse Cycles’ offer.

d. What other factors should Cruise consider before deciding to accept the special order?

Transcribed Image Text:

Manufacturing costs Direct materials.. Direct labor... Factory overhead Total Markup (60%). Selling price. $24,000 30,000 36,000 90,000 54,000 $144,000