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 24,500 units of a power steering system component for $200 per unit. Peter Wu, vice-president of sales, notes that although 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 fixed costs, Huang's accountant used the high-low method with the following production and cost information for the last two years: 210,000 units 230,000 units Direct material costs $18.375.000 $20,125,000 5.635.000 Direct labor costs 5.145.000 22,235,000 23,305,000 Overhead costs 9.085.000 Selling and administrative costs $55,740,000 265,4) $59,220,000 5257.48 Total costs per unit T.). Chan, vice-president of engineering, feels that any new market should first show its prontability and that the $200 per unit offer is not only below the regular 1260 sling price, but it's below the unit cost of the component. She also points out that there will be additional setup costs of $270,000 and that Huang will have to lease some special equipment for $300,000 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)? S A Tries 0/6 Send Feedback

Answer 1

Total variable cost = $2.25 + ($59,220,000 - $55,740,000) / (230,000 - 210,000) = $176.25

Total Fixed cost = $270,000 + $300,000 = $570,000

Profit = 24,500 X ($200 - $176.25) - $570,000 = $11,875