Question

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 $196 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.

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 $196 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: 194,000 units Direct material costs $ 16,005,000 Direct labor costs Overhead costs 4,268,000 21,573,000 7,134,000 234,000 units $19,305,000 5,148,000 23,753,000 7,574,000 Selling and administrative costs Total costs $48,980,000 $55,780,000 $238.38 Total costs per unit $252.47 T.). Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $196 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 $205,000 and that Huang will have to lease some special equipment for $295,000. 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)?

Answer 1

Solution:

7 9 10 Using high Low method Computation of variable portion of overhead costs Units Overhead costs High level 234000 23753000 less: Low level 194000 21573000 Difference 40000 2180000 Variable overhead cost per unit (Diffencial cost/differential 54.50 units) 11 12 16 17 18 19 Using High low method Computation of variable portion of Selling and administrative costs Units selling and admin. cost High level 234000 7574000 less: Low level 194000 7134000 Difference 40000 440000 Variable selling and administrative cost per unit (Diffencial 11.00 cost/differential units) Computation of existing Total Variable cost per unit Direct materials (Cost/units) 82.50 Direct labor (cost/units) 22.00 variable overhead cost 54.50 Variable selling and administrative cost 11.00 Total variable cost per unit 170.00 32 33 34 35 Computation of Expected profit on Special order Sales revenue (26500*$196) 5194000 Less: Costs: Variabe costs (26500*$170.00) 4505000 Addition shipping costs (26500*$2) 53000 Additional setup costs 205000 Lease cost of special equipment 295000 36 37 38 Expected profit (loss) on special order 136000 43 44 45 47 48 Sheet261 Sheet146 (8) Sheet442 ) Sheet37 ) Sh