Question

Using the high-low method
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:
T.J. 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.

194,000 units 234,000 units Direct material costs $16,005,000 $19,305,000 Direct labor costs 4,268,000 5,148,000 Overhead costs 21,573,000 23,753,000 Selling and administrative costs 7,134,000 7,574,000 Total costs $48,980,000 $55,780,000 Total costs per unit $252.47 $238.38

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

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

В Answer 3 Firstly we have to calculate the variable portion of each cost using High Low Method 5 Particulars 6 Direct Material 7 Direct Labour 8 Overhead Cost 9 Selling and adminstrative cost 10 Total Cost at 194000 Cost at 234000 Units Units 16005000 19305000 4268000 5148000 21573000 23753000 7134000 7574000 48980000 55780000 Variable Cost Per Unit 82.5 22.0 54.5 11.0 170.0 12 Formula = (high level cost - low level cost)/(high level units - low level units) 14 Now we can prepare the statement of cost Benefit from acceptance of offer 15 Increased Revenue (26500*196) $ 5,194,000 16 Increased Variable Cost ((170+2) * 26500) $ (4,558,000) 17 Increased fixed cost (205000+295000) $ (500,000) 18 Net benefit/ (loss) from acceptance of offer $ 136,000 20 Thus the correct answer is Benefit of = $ 136000