PROBLEM 1:

Mountain Goat Cycles has just received a request from the Seattle Police Department to produce 100 specially modified mountain bikes at a price of $558 each. The bikes would be used to patrol some of the more densely populated residential sections of the city. Mountain Goat Cycles can easily modify its City Cruiser model to fit the specifications of the Seattle Police. The normal selling price of the City Cruiser bike is $698, and its unit product cost is $564 as shown below:

Direct materials.....*

$372

Direct lo...................

90

Manufacturing overhead...

102

Unit product cost ................

$564

The variable portion of the above manufacturing overhead is $12 per unit. The order would have no effect on the company's total fixed manufacturing overhead costs. The modifications requested by the Seattle Police Department consist of welded brackets to hold radios, nightsticks, and other gear. These modifications would require $34 in incremental variable costs. In addition, the company would have to pay a graphics design studio $2,400 to design and cut stencils that would be used for spray painting the Seattle Police Department's logo and other identifying marks on the bikes. This order should have no effect on the company's other sales. The production manager says that she can handle the special order without disrupting any of the company's regular scheduled production.

Required: What effect would accepting this order have on the company's net operating income?

Mountain Goat Cycles has just received a request from the Seattle Police Department to produce 100 specially modified mountain bikes at a price of $558 each. The bikes would be used to patrol some of the more densely populated residential sections of the city. Mountain Goat Cycles can easily modify its City Cruiser model to fit the specifications of the Seattle Police. The normal selling price of the City Cruiser bike is $698, and its unit product cost is $564 as shown below: The variable portion of the above manufacturing overhead is $12 per unit. The order would have no effect on the company's total fixed manufacturing overhead costs. The modifications requested by the Seattle Police Department consist of welded brackets to hold radios, nightsticks, and other gear. These modifications would require $34 in incremental variable costs. In addition, the company would have to pay a graphics design studio $2,400 to design and cut stencils that would be used for spray painting the Seattle Police Department's logo and other identifying marks on the bikes. This order should have no effect on the company's other sales. The production manager says that she can handle the special order without disrupting any of the company's regular scheduled production. Required: What effect would accepting this order have on the company's net operating income