Question

Can someone please help me and provide an explanation for this? Having a hard time.

Special Order: High-Low Cost Estimation Autoliv produces air bag systems that it sells to automobile manufacturers throughout the world. Assume the company has a capacity of 50 million units per year, it is currently producing at an annual rate of 40 million units. Autoliv has received an order from a Japanese manufacturer to purchase 100,000 units at $65 each. Budgeted costs for 40 million and 45 million units are as follows: (in thousands, except costs per unit) 40 Million Units 45 Million Units Manufacturing costs Direct materials $ 560,000 $630,000 Direct labor 220,000 247,500 Factory overhead 1,780,000 1,822.500 Total 2,560,000 2,700,000 Selling and administrative 1,120,000 1,125,000 Total $ 3,680,000 $ 3,825,000 Costs per unit Manufacturing $ 64.00 $ 60.00 Selling and administrative 28.00 25.00 Total $92.00 $ 85.00 Sales to auto manufacturers are priced at $120 per unit, but the sales manager believes the company should aggressively seek the Japanese business even if it results in a loss of $20 per unit. She believes obtaining this order would open up several new markets for the company's product. The general manager commented that the company cannot tighten its belt to absorb the $2,000,000 loss ($20 * 100,000) it would incur if the order is accepted. (a) Determine the financial implications of accepting the order. (Hint: Use the high-low method to determine variable costs per unit.) Accepting the offer will increase . • profits by $ (b) How would your analysis differ if the company were operating at capacity? Determine the advantage or disadvantage of accepting the order under full-capacity circumstances. Use a negative sign with your answer to indicate a net disadvantage, if applicable. $ 0 X Check

Answer 1

We would solve the question through variablecosting method involving decsion making based on contribtution.

Some basic calculations are as below:

1. Dir Material p.u=14(fully variable)

2. Dir Labour p.u= 5.5 fully variable

3. variable FOH= 1822500-1780000/45-40=8.5

4. Fixed FOH=1780000-8.5*40 million=1440000(in thoudands)

5. Variable SOH=1125000-1120000/45-40=1 per unit

6.Fixed SOH=1125000-45000=1080000

7. Total variable cost=14+5.5+8.5+1=29

8. TOtal Fixed Exp=1440000+1080000=2520000

Statement of profit at sale level of 40 million

amount in thousands

1.COntribution(120-29)=91*40 million=3640000

2.Fixed Exp=2520000

3. profit(1-2)=1120000

Revised profit after accepting order of japanese manufacturer:

1. Existing contribution=3640000

2. Addtional contribution=100000*(65-29)=3600

3. Fixed costs=2520000

4. Rev profit=1123600

5. % increase in profit=3600/1120000=.3214%

(b) In company operated at full capacity, Company would loose 55 per unit(120-65) on 100000 units sold to japanese manuf.

Change in Profit= -5500

Working-- Contribution lost(120-29)*100000=9100

Contribution earned(65-29)*100000=3600

Net Disadvantage= -5500

The fall on profit is the obvious disadvantage of selling to japanese manuf.

Advntage is that firm is expanding its customer base and reaching international markets. In periods of low domestic demand it can sustain by suppling goods beyond border.