Mountain Goat Cycles has just received a request from the Seattle Police Department to produce 100 specially modified mountain bikes at $179 each. Mountain Goat Cycles can easily modify its City Cruiser model to fit the specifications of the Seattle Police Department. The normal selling price of the City Cruiser bike is $249 and its unit product cost is $182 as shown below:
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Direct Materials
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$86
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Direct Labor
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$45
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Manufacturing Overhead
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$51
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Total Unit Product Cost
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$182
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The variable portion of the above manufacturing overhead is $6 per unit. The order would have no effect on the company's total fixed manufacturing overhead costs. The special modifications requested by the Seattle Police Department would require $17 per unit incremental variable costs. In addition, the company would have to pay a graphics design studio $1,200 to design and cut stencils that would be used for painting the Police Department's logo on the bikes. Currently, Mountain Goat Cycles is not operating at capacity.
Should Mountain Goat Cycles accept the special order? (support your work with numbers).
Would it make a difference if Mountain Goat Cycles was operating at capacity?