Special Order (LO1, 2, 3)

Mobile Solutions Company produces a variety of electric scooters. 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 Solutions produces):

Manufacturing costs Direct materials........ $10,000 DiecmabOlems.. core 12,000 Factory overhead ...... 18,000 POtalaee eer farts cri hilcteiete.< 40,000 Markup (60%).........-. 24,000 Sellingipricess «25... 27 $64,000 Northern Cycles rejected this price and offered to purchase the 300 scooters at a price of $52,000. The following additional information is available:

* Mobile Solutions has sufficient excess capacity to produce the scooters.

* Factory overhead is applied on the basis of direct labor dollars.

* Budgeted factory overhead is $400,000 for the current year. Of this amount, $100,000 is fixed. Of the $18,000 of factory overhead assigned to the Northern Cycles order, only $13,500 is driven by the special order; $4,500 is a fixed cost.

¢ Selling and administrative expenses are budgeted as follows:

Gel aacee $90,000 per year Variable.... $20 per unit manufactured and sold Required

a. The president of Mobile Solutions wants to know if he should allow Northern Cycles to have the scooters for $52,000. Determine the effect on profits of accepting Northern Cycles’ offer.

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

c. Assume Mobile Solutions is operating at capacity and could sell the 300 scooters at its regular markup.

1. Determine the opportunity cost of accepting Northern Cycles’ offer.

2. Determine the effect on profits of accepting Northern Cycles’ offer.

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