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. Calculate the net benefit (cost) of accepting the order from the German business, assuming the company is operating at full capacity.

Explanation / Answer

Additional Cost for 60000 units No of Units Nos 180000 240000 Cost Direct Material $ 450000 600000 150000 Direct Labour $ 315000 420000 105000 Factory Overhead $ 1215000 1260000 45000 1980000 2280000 300000 Selling & Administratin exp $ 765000 780000 15000 2745000 3060000 315000 Sale value (60000X9) 540000 Profit on order of 60000 Unit 225000 Therefore it is better to accept the order.

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