Huang Automotive is presently operating at 75% of capacity. The company recently

Question

Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 21,500 units of a power steering system component for $190 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.

Huang's production and cost information for the last two years for the component are as follows:

194,000 Units 221,000 Units

Direct Material Costs:: 16,490,000 18,785,000

Direct Labor Costs: 4,365,000 4,972,500

Overhead Costs: 22,185,000 23,602,500

Selling/Admin Costs: 8,140,000 8,410,000

Total Cost: 51,180,000 55,770,000

Total Cost per Unit: 263.81 252.35

T.J. Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $190 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 $300,000 and that Huang will have to lease some special equipment for $225,000.

Required
1. What would the expected profit be on the special order (use a negative sign for a loss)?

Explanation / Answer

As the company has the capacity of producing the additional units. So only the overhead expenses would increase, selling and admin cost would remain sam irrespective of the units produced.

So the cost per unit for additional units produced would be = 22,185,000 /194,000

= 114

units                       21,500 Selling price                             190 shipping charges                                  3 Total variable costs               22,185,000 Units produced                     194,000 Unit cost                             114 Revenue                 4,085,000 Shipping charges                       64,500 Cost                 2,458,647 Leasing charges                     225,000 Equipment costs                     300,000 Total loss 1,036,853

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