Question

Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 23,000 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 $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: Direct material costs Direct labor costs Overhead costs Selling and administrative costs Total costs Total costs per unit 203,000 units $16,747,500 5,582,500 23,868,000 11,528,500 $57,726,500 $284.37 222,000 units $18,315,000 6,105,000 24,932,000 11,709,000 $61,061,000 $275.05 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 $290,000 and that Huang will have to lease some special equipment for $285,000. 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

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.

AB Answer www Calculation of Variable Cost Under High Low Method Variable cost Per 4 Cost 203000 Units 222000 Units Units 5 Direct Material Costs 16747500 18315000 82.5 6 Direct Labor Costs 5582500 6105000 27.5 7 Overhead Costs 23868000 24932000 56.0 8 Selling and adminstrative costs 11528500 11709000 9.5 9 Total Costs 57726500 61061000 10 Total Costs Per unit 284.37 275.05 175.5 11 12 Formula for Variable cost per Unit = (High level cost-low level cost)/(high level units- low level units) 13 14 Statement of cost benefit 15 Particulars Amount 16 Increase in Revenue (23000*198) $ 4,554,000 17 Increase in standard variable cost (23000*175.5) $ (4,036,500) 18 Increase in shipping cost (3*23000) $ (69,000) 19 Additional setup cost $ (290,000) 20 Lease of special equipment $ (285,000) 21 Benefit/ (loss) from secial order (126,500) 22 23 Thus the correct answer is expected profit on special order 24. -$126,500