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 20,500 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 $2.75 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: T.J. Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $200 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 $280,000 and that Huang will have to lease some special equipment for $245,000. Required 1. What would the expected profit be on the special order (use a negative sign for a loss)?

Explanation / Answer

Variable cost remain constant in per unit whereas fixed cost remain same in totality (whether new offer is accepted or not it will be incurred) .so variable cost is a relevant cost whereas fixed cost is a irrelevant cost.

In case of mixed cost, variable cost per unit =change in cost/change in units

                                                               =(22547500- 20762500) /

                                                              

Expected profit:

per unit cost Direct material variable (relevant) 17220000 /205000 84 Direct labor Variable(relevant) 5330000/205000 26 overhead Mixed cost (Fixed +variable) soOnly variable portion is relevant (22547500- 20762500) /(239000-205000) = 1785000 /34000 52.50 selling cost Mixed cost (Fixed +variable) soOnly variable portion is relevant (10509500-10152500)/(239000-205000) = 357000/34000 10.50 shipping cost 2.75 Total cost 175.75

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