Midnight Rambler Co. produces a variety of electric scooters. Management follows a pricing policy of manufacturing costs plus 60 percent. In response to request from Jack Flash Cycles, the following price has been developed for an order of 300 scooters (the smallest scooter Midnight Rambler produces: Manufacturing costs Direct materials...... Direct labor..... Factory overhead $24,000 30,000 36,000 Total 90,000 Markup (60%) 54,000 $144,000 Selling price. Jack Flash rejected this price and offered to purchase the 300 scooters at a price of $120,000. The following additional information is available: Midnight Rambler has sufficient excess capacity to produce the scooters Factory overhead is applied ono 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 Jack Flash Cycles, only $27,000 is driven by special order; $9,000 is a fixed cost. Selling and Administrative expenses are budgeted as follows: o Fixed.. o Variable. .$180,000 per year .$40 per unit manufactured and sold. Required: a. The president of Midnight Rambler wants to know if he should allow Jack Flash to have the scooters for $120,000. Determine the effect on profits from accepting Jack Flash's offer b. Briefly explain why certain costs should be omitted from the analysis in requirement (a.) c. Assume Midnight Rambler is operating at capacity and could sell the 300 scooters at its regular markup: 1. Determine the Opportunity Cost of accepting Jack Flash's offer 2. Determine the effect on profits of accepting Jack Flash's offer d. What other factors should Midnight Rambler consider before deciding to accept the special order?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The president of Midnight Rambler wants to know if he should allow Jack Flash to have the scooters for $120,000. Determine the effect on profits from accepting Jack Flash’s offer.
Briefly explain why certain costs should be omitted from the analysis in requirement (a.)
Assume Midnight Rambler is operating at capacity and could sell the 300 scooters at its regular markup:
1. Determine the Opportunity Cost of accepting Jack Flash’s offer.
2. Determine the effect on profits of accepting Jack Flash’s offer
What other factors should Midnight Rambler consider before deciding to accept the special order?

Midnight Rambler Co. produces a variety of electric scooters. Management follows a pricing
policy of manufacturing costs plus 60 percent. In response to request from Jack Flash Cycles,
the following price has been developed for an order of 300 scooters (the smallest scooter
Midnight Rambler produces:
Manufacturing costs
Direct materials......
Direct labor.....
Factory overhead
$24,000
30,000
36,000
Total
90,000
Markup (60%)
54,000
$144,000
Selling price.
Jack Flash rejected this price and offered to purchase the 300 scooters at a price of $120,000.
The following additional information is available:
Midnight Rambler has sufficient excess capacity to produce the scooters
Factory overhead is applied ono 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 Jack Flash Cycles, only $27,000 is
driven by special order; $9,000 is a fixed cost.
Selling and Administrative expenses are budgeted as follows:
o Fixed..
o Variable.
.$180,000 per year
.$40 per unit manufactured and sold.
Required:
a. The president of Midnight Rambler wants to know if he should allow Jack Flash to have
the scooters for $120,000. Determine the effect on profits from accepting Jack Flash's
offer
b. Briefly explain why certain costs should be omitted from the analysis in requirement (a.)
c. Assume Midnight Rambler is operating at capacity and could sell the 300 scooters at its
regular markup:
1. Determine the Opportunity Cost of accepting Jack Flash's offer
2. Determine the effect on profits of accepting Jack Flash's offer
d. What other factors should Midnight Rambler consider before deciding to accept the
special order?

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