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 22,500 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. Huang's production and cost information for the last two years for the component are as follows: Direct material costs Direct labor costs Overnead costs Selling and administrative costs Total costs Total costs per unit 199,000 units $17,512,000 4,378,000 23,149,000 8,988,000 $54,027,000 $271.49 230,000 units $20,240,000 5,060,000 24,730,000 9,360,000 $59,390,000 $258.22 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 $270 selling price, but it's below the unit cost of the component. She also points out that there will be additional setup costs of $285,000 and that Huang will have to lease some special equipment for $245,000 Required 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)?

Explanation / Answer

Total cost for 199,000 unts    $ 54027,000 Total cost for 230,000 units $ 59390,000 Variable cost per unit = Change in cost / change in units                                             ( 59390,000-54027,000 ) / ( 230,000 -199,000)= $ 173 per unit Now, Special order is for 22,500 units, the implicatiosn on profits will be as follows: Sales revenue ( 22500 units @200) 4500000 Less: Variable cost ( 22500 units @ 173) 3892500 Less: Additional variable shipping cost(22500 units @2.25) 50625 Additional contribution earned 556875 Less: Additional fixed cost incurred Additional setup 285000 Additional cost of lease of equipment 245000 Net income from Special order 26875 Therefore, Special order should be accepted as it earns a net income of $ 26,875

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