Question

This is a special order problem that also requires that you use the high low method to estimate some cost function parameters, so you may want to review the high-low method lectures in Module 1. As with almost all of the analyses that we have done, determining variable and fixed costs, and knowing what to do with them, is critical. Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 25,000 units of a power steering system component for $199 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: 202,000 units $17,978,000 222,000 units $19,758,000 5,353,000 Direct material costs Direct labor costs Overhead costs sts Selling and administrative costs 5,883,000 26,099,000 25,009,000 12,424,000 $ 60,764,000 $300.81 Total costs Total costs per unit 12,664,000 $ 64,404,000 $290.11 T.J. Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $199 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 $210,000 and that Huang will have to lease some special equipment for $260,000. 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)? Submit Answer Tries 0/6

high low method

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.

Answer 3 Firstly we have to calculate the variable portion of each cost using High Low Method Cost at 202000 Cost at 222000 Variable Cost 5 Particulars Units Units Per Unit 6 Direct Material 17978000 19758000 89.0 7 Direct Labour 5353000 5883000 26.5 8 Overhead Cost 25009000 26099000 54.5 9 Selling and adminstrative cost 12424000 12664000 12.0 10 Total 60764000 64404000 182.0 11 12 Formula = (high level cost - low level cost)/(high level units - low level units) 13 14 Now we can prepare the statement of cost Benefit from acceptance of offer 15 Increased Revenue (25000*199) $ 4,975,000 16 Increased Variable Cost ((182+2) *25000) $ (4,600,000) 17 Increased fixed cost (210000+260000) $ (470,000) 18 Net benefit/ (loss) from acceptance of offer (95,000) 19 20 Thus the correct answer is Loss of = ($95000) 21