Question

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 accountant used the high-low method with the following production and cost information for the last two years: 210,000 units 221,000 units Direct material costs $16,800,000 $17,680,000 Direct labor costs 5,880,000 6,188,000 Overhead costs 25,600,000 26,260,000 Selling and administrative costs 10,510,000 10,631,000 Total costs $58,790,000 $60,759,000 $279.95 $274.93 Total costs per unit 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 $260 selling price, but it's below the unit cost of the component. She also points out that there will be additional setup costs of $285,000 and that Huang will have to lease some special equipment for $235,000 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)? NEW

Answer 1

Units	210,000	221,000
Direct material	16,800,000	17,680,000
Direct Labor	5,880,000	6,188,000
Overhead costs	25,600,000	26,260,000
Selling and Admin cost	10,510,000	10,631,000
Total cost	58,790,000	60,759,000
Using high low method, variable cost per unit = Difference in Cost/Difference in Volume
Overhead	60.00	per unit
Selling and Admin Cost	11.00	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	4,851,000
Less: costs
Direct material	1,960,000
Direct Labor	686,000
Overhead costs	1,470,000
Selling and Admin cost	269,500
Shipping cost	49,000
Setup costs	285,000
Lease cost	235,000
Total cost	4,954,500
Profit from special order	-103,500
Should not be accepted