Question

This is a special order problem that also requires that you use the high low method to estimate some cost function parameters, so you may want to review the high-low method lectures in Module 1. As with almost all of the analyses that we have done, determining variable and fixed costs, and knowing what to do with them, is critical. Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 26,500 units of a power steering system component for $199 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $3.00 shipping cost for each component, he thinks that accepting the order will get the company's "foot in the door" of an expanding international market. To determine variable and fixed costs, Huang's accountant used the high-low method with the following production and cost information for the last two years: 234,000 units Direct material costs Direct labor costs Overhead costs 203,000 units $17,965,500 5,582,500 25,274,000 11,636,000 $60,458,000 $297.82 $20,709,000 6,435,000 27,072,000 12,008,000 $66,224,000 $283.01 Selling and administrative costs Total costs Total costs per unit T.). Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $199 per unit offer is not only below the regular $250 selling price, but it's below the unit cost of the component. She also points out that there will be additional setup costs of $260,000 and that Huang will have to lease some special equipment for $260,000. REQUIRED [6 tries] 1. Using the high-low method to determine cost behavior, what would the expected profit be on the special order (use a negative sign for a loss)? Submit Answer Tries 0/6

Answer 1

Units	203,000	234,000
Direct material	17,965,500	20,709,000
Direct Labor	5,582,500	6,435,000
Overhead costs	25,274,000	27,072,000
Selling and Admin cost	11,636,000	12,008,000
Total cost	60,458,000	66,224,000
Using high low method, variable cost per unit = Difference in Cost/Difference in Volume
Overhead	58	per unit
Selling and Admin Cost	12	per unit
Direct material and direct labor are variable costs
Since there is spare capacity, only incremental costs are relevant for the special order
Calculation of profit from special order:
Revenue	5,273,500
Less: costs
Direct material	2,345,250
Direct Labor	728,750
Overhead costs	1,537,000
Selling and Admin cost	318,000
Shipping cost	79,500
Setup costs	260,000
Lease cost	260,000
Total cost	5,528,500
Profit from special order	-255,000
Expected Profit = -$255000 i.e. loss