SafeRide, Inc. produces air bag systems that it sells to North American automobi

Question

SafeRide, Inc. produces air bag systems that it sells to North American automobile manufacturers. Although the company has a capacity of 300,000 units per year, it is currently producing at an annual rate of 180,000 units. SafeRide, Inc. has received an order from a German manufacturer to purchase 60,000 units at $9.00 each. Budgeted costs for 180,000 and 240,000 units are as follows: 180,000 Units 240,000 Units Manufacturing costs Direct materials $ 450,000 $ 600,000 Direct labor 315,000 420,000 Factory overhead 1,215,000 1,260,000 Total 1,980,000 2,280,000 Selling and administrative 765,000 780,000 Total $ 2,745,000 $ 3,060,000 Costs per unit Manufacturing $ 11.00 $ 9.50 Selling and administrative 4.25 3.25 Total $ 15.25 $ 12.75 Sales to North American manufacturers are priced at $20 per unit, but the sales manager believes the company should aggressively seek the German business even if it results in a loss of $3.75 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 $225,000 loss ($3.75 × 60,000) it would incur if the order is accepted. (a) Calculate the net benefit (cost) of accepting the order from the German business. $Answer (b) Calculate the net benefit (cost) of accepting the order from the German business, assuming the company is operating at full capacity. $Answer

Explanation / Answer

SafeRide Inc Cost Beneft analysis Cost study 180000 units level 240000 units level Incremental for 60000 unit Incremental for 60000 unit Fixed part of cost Details Per unit Total Per unit Total Direct Material 2.5              450,000 2.5         600,000 Direct Labor 1.75              315,000 1.75         420,000 Factory OH           1,215,000      1,260,000          45,000 0.75      1,080,000 Selling & admin              765,000         780,000          15,000 0.25         720,000 We can revise the factory OH & Selling & Disrt costs as follows; Variable /unit Fixed Factory OH 0.75           1,080,000 Selling & admin 0.25              720,000 Revised format for cost benefit study Sale =180,000 units @ 20 /unit Sale additional 60000 units @ 9/unit Cost benefit study 180000 units level 240000 units level Details Per unit Total Per unit Total Sales revenue 1 20           3,600,000 20      3,600,000 Sales revenue 2 9         540,000 Total Sales revenue           3,600,000      4,140,000 Less Variable costs Direct Material 2.5              450,000 2.5         600,000 Direct Labor 1.75              315,000 1.75         420,000 Variable Factory OH 0.75              135,000 0.75         180,000 Variable Selling & admin cost 0.25                 45,000 0.25            60,000 Total Variable costs 5.25              945,000 5.25      1,260,000 Contribution 14.75           2,655,000      2,880,000 Less Fixed cost Fixed Factory OH           1,080,000      1,080,000 Fixed Selling & admin cost              720,000         720,000 Total Fixed cost           1,800,000      1,800,000 Net Operating Income              855,000      1,080,000 Increase In Contribution         225,000 Increase in Net Income         225,000 a The net benefit in accepting the German order is $225,000 b If the company runs in full capacity of 300,000 and accepts the offer from Germany; 1 Additional contribution from 60,000 units @ (9-5.25)=3.75 = $     195,000 So net benefit or cost will be the difference of $195,000 and the additional fixed cost required to support the 60,000 units extra production capacity .

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