Question

Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 28,000 units of a power steering system component for $190 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 used the high-low method with the following production and cost information for the last two years! Direct material costs Direct labor costs Overhead costs 199,000 units $17,114,000 4,179,000 24,945,000 7,291,500 $53,529,500 $268.99 224,000 units $19,264,000 4,704,000 26,320,000 7,504,000 $57,792,000 $258.00 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 $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 $205,000 and that Huang will have to lease some special equipment for $250,000 REQUIRED (6 tries) 1. Using the high-low method to determine cost behavior, what would the expected pronit be on the special order (use a negative sign for a loss)? - 1890000 Submit Answer incorrect. Tries 1/6 Previous Tries

Answer 1

Units	199,000	224,000
Direct material	17,114,000	19,264,000
Direct Labor	4,179,000	4,704,000
Overhead costs	24,945,000	26,320,000
Selling and Admin cost	7,291,500	7,504,000
Total cost	53,529,500	57,792,000
Using high low method, variable cost per unit = Difference in Cost/Difference in Volume
Overhead	55	per unit
Selling and Admin Cost	8.5	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	5,544,000
Less: costs
Direct material	2,408,000
Direct Labor	588,000
Overhead costs	1,540,000
Selling and Admin cost	238,000
Shipping cost	63,000
Setup costs	205,000
Lease cost	250,000
Total cost	5,292,000
Profit from special order	252,000
i.e. Profit

A 1 2 Units 199000 224000 3 Direct material 17114000 =B3*C2/B2 4 Direct Labor 4179000 =B4*C2/B2 5 Overhead costs 24945000 26320000 6 Selling and Admin cost 7291500 7504000 7 Total cost SUM(B3:36) =SUM(C3:06) 8 9 Using high low method, variable cost per unit = Difference in Cost/Difference in Volume 10 Overhead =(C5-B5)/(C2-B2) per unit 11 Selling and Admin Cost =(C6-B6)/(C2-B2) per unit 12 13 Direct material and direct labor are variable costs 14 Since there is spare capacity, only incremental costs are relevant for the special order 15 16 Calculation of profit from special order: 17 Revenue =28000*198 18 Less: costs 19 Direct material =28000*B3/B2 20 Direct Labor =28000*B4/B2 21 Overhead costs =28000*B10 22 Selling and Admin cost =28000*B11 23 Shipping cost =28000*2.25 24 Setup costs 205000 25 Lease cost 250000 26 Total cost =SUM(B19:B25) 27 Profit from special order =B17-B26 28 i.e. Profit 29