what would the opportunity cost be for accepting the order? Would it be the tota
ID: 2549540 • Letter: W
Question
what would the opportunity cost be for accepting the order? Would it be the total 60% mark-up $27,000 subtracted by the assigned factory overhead of $13,500?
See Problem Question below:
Special Order 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: Northern Cycles rejected this price and offered to purchase the 300 scooters at price of $60,000.
Manufacturing Costs:
Diret Materials.......................12,000
Direct Labor.......................... 15,000
Factory Overhead..................18,000
Total.....................................45,000
Mark-up (60%).......................27,000
Selling Price..........................72,000
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 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:
Fixed……………………………. $90,000 per year
Variable…………………………. $20 per unit manufactured and sold
Questions: a) The president of Mobile Solutions wants to know if he should allow Northern Cycles to have the scooters for $60,000. Determine the effect on profits of accepting Northern Cycles’ offer.
b) 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.
Explanation / Answer
Since asked specifically about Opportunity cost, answering that only.
Opportunity cost is the cost of one alternative chosen above another alternative.
Profit if alternative 1 i.e. it is decided to pursue special order would be
$ 60000 - $ 45000 = $ 15000
In alternative 2, however company is operating at full capacity than it would not have to spend $ 13500 on the special driven cost and thus the cost would be
Thus, if order of Norther cycle is chosen than there would be loss of $ 34500 in terms of not choosing the order and selling atregular price. Thus Opportunity Cost would be $ 34500
Direct Materials 12000 Direct labour 15000 Factory overhead 4500 Total Manufacturing cost 31500 S& A overhead @ $20 per unit 6000 Total cost of manufacturing, S&A (A) 37500 Price 72000 Net Income (B) $34500Related Questions
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