Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 26,000 units of a power steering system component for $198 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $2.00 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:
208,000 units | 230,000 units | |
Direct material costs | $17,680,000 | $19,550,000 |
Direct labor costs | 5,616,000 | 6,210,000 |
Overhead costs | 21,024,000 | 22,190,000 |
Selling and administrative costs | 12,088,000 | 12,330,000 |
Total costs | $56,408,000 | $60,280,000 |
Total costs per unit | $271.19 | $262.09 |
T.J. Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $198 per unit offer is not only below the regular $270 selling price, but it's below the unit cost of the component. She also points out that there will be additional setup costs of $220,000 and that Huang will have to lease some special equipment for $290,000. 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)?
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208,000 Units | 230,000 Units | Difference | Variable Cost | Fixed Cost | |
Units | 208,000 | 230,000 | 22,000 | ||
Direct material costs | $ 17,680,000 | $ 19,550,000 | $ 1,870,000 | $ 85.00 | $ - |
Direct labor costs | $ 5,616,000 | $ 6,210,000 | $ 594,000 | $ 27.00 | $ - |
Overhead costs | $ 21,024,000 | $ 22,190,000 | $ 1,166,000 | $ 53.00 | $ 10,000,000 |
Selling and administrative costs | $ 12,088,000 | $ 12,330,000 | $ 242,000 | $ 11.00 | $ 9,800,000 |
Per unit | Total for 26,000 | ||||
Direct Material cost | $ 85.00 | $ 2,210,000 | |||
Direct labor cost | $ 27.00 | $ 702,000 | |||
Overhead cost | $ 53.00 | $ 1,378,000 | |||
Selling and admin cost | $ 11.00 | $ 286,000 | |||
Shipping cost | $ 2.00 | $ 52,000 | |||
Set up cost | $220,000/26,000 | $ 8.46 | $ 220,000 | ||
Special Equipment Cost | $290,000/26,000 | $ 11.15 | $ 290,000 | ||
$ 197.62 | $ 5,138,000 | ||||
Selling Price | $ 198.00 | $ 5,148,000 | |||
Profit | $ 0.38 | $ 10,000 |
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from...
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 25,000 units of a power steering system component for $195 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $2.25 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...
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Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 23,000 units of a power steering system component for $198 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...
Huang Automotive is presently operating at 75 % of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 24,500 units of a power steering system component for $198 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $2.00 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...
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 21,000 units of a power steering system component for $197 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $2.75 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...
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 25,000 units of a power steering system component for $200 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $2.50 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...
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 22,500 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 $2.25 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...
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 22,500 units of a power steering system component for $197 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...
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 26,000 units of a power steering system component for $200 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $2.25 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...
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 22,500 units of a power steering system component for $196 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...