Question

Course Contents > MODULE 2 PROBLEMS ... LON-CAPA... PROBLEM S SPECIAL ORDER DECISION.. - Timer Notes Evaluate Feedback Print Info 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 25,000 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 $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: 204,000 units 234,000 units $20.825.000 Direct material costs $18,156,000 Direct labor costs 4,182.000 4,797,000 Overhead cost 22,414,000 24.019,000 Selling and administrative costs 9,044,000 9,374,000 Total costs $53,796,000 $59,016,000 $252.21 Total costs per unit $263.71 TJ. Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $197 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 $290,000 and that Huang will have to lease some special equipment for $220,000 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 AnswerTries 0/6 em NEW

Answer 1

Thursd 1. Calculation of costs uring high-low method - Variable Cost = HAC-LAC- HAUS- LAUS where, HAC - Highest activity cost. LAC - Lowest activity cost HAU & Highest activity units LAU = Lowest activity units variable Cost = TNG000- = 590 16000-53796000 234000 - 204000 Variable Cost =5220000 30000 = $ 174 per unit fixed Cost Total fixed cost = HAC- (variable cost XHAUS) - 59016000 -(174 X 234000) = 18300000 &

Profit expected on the special Order- Salee revenue (197* 25000) = 4925000 Tess: Voviable cost (174x25000) = -4350000 less: Additional shipping cost - 75000 (3125000 len: Additional Setup Cost =- 290000 len: Special equipment lease : - 220000 Expected loss on specal order -10,000