Question

Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 28,000 units of a power steering system component for $198 per unit. Peter Wu, vice-president of sales, notes that arhough there will be an additional $2.25 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 food costs, Huang's accountant used the high-low method with the following production and cost information for the last two years: 224,000 units $19,264,000 Direct material costs Directa 199,000 units $17,114,000 4,179,000 24,945,000 7,291,500 $53,529,500 $268.99 4,704,000 26,320,000 Overhead costs Selling and administrative costs 7,504,000 Total costs Total costs per unit $57,792,000 $258.00 T.). Chan, vice-president of engineering, feels that any new market should first show is prontability and that the $195 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 $205,000 and that Huang will have to lease some special equipment for $250,000. REQUIRED [6 tries] 1. Using the high-low method to determine cost behavior, what would the expected proht be on the special order (use a negative sign for a loss)?

Answer 1

Calculation of Existing Contribution per unit

Particulers                                                                                                         Values

(A) Selling price per unit                                                                                                                                260

(B) Variable cost

      Direct Material (19264000-17114000/224000-199000)     =     86

      Direct Labor     (4704000-4179000/224000-199000)          =      21

      Overhead Cost(26320000-24945000/224000-199000)      =      55

      Sellign &Adm Cost( 7504000-7291500/224000-199000)   =      85

      Total Variable Cost (B)                                                                                                                                 247

   (C) Contribution per unit (A-B)    13   

Statement showing the Expected profit/Loss on accepting the offer from korean Truck Manufacturer

      Particulers                                                                                                                                               Values

(A) New Selling Price per unit                                                                                                                       198    

(B) Variable Cost  

   Existing Variable cost          247

   Additional Shipping Cost     2.25

      Total Variable Cost (B)                                                                                                                             249.25

(C) Contribution per unit       (A-B) -51.25

(D) No of Units to be sold = 28000

(E) Total Contribution (C*D) -1435000

(F) Additional Setup Cost -205000

(G) Special Equipment Cost    -250000

(H) Total Profit/Loss (E+F+G) -1890000.

Accepting the new order would results into a loss of 1890000 as the selling price is less than the Variable cost of the product and additionally there is an additional setup cost and special equipment cost.