Question

Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 25,500 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 $2.50 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. To determine variable and fixed costs, Huang's accountant used the high-low method with the following production and cost information for the last two years: 201,000 units 236,000 units $17,989,500 $21,122,000 5,900,000 5,025,000 21,650,500 23,418,000 Direct material costs Direct labor costs Overhead costs Selling and administrative costs Total costs Total costs per unit 11,311,500 11,714,000 $55,976,500 $278.49 $62,154,000 $263.36 TJ. 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 $275,000 and that Huang will have to lease some special equipment for $255,000. REQUIRED [6 tries] 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)? Submit Answer Tries 0/6

Answer 1

FIXED COSTS are constant and they will not change with acceptance of order

so they are not relevant for decision making

we will find out fixed and variable cost.

	activity high a	activity low b	change a-b	variable cost [change in cost/change in activity]
activity	201000	236000	35000
direct material cost	17989500	21122000	3132500	$89.5[3132500/35000]
labor cost	5025000	5900000	875000	25$[875000/35000]
overhead cost	21650500	23418000	1767500	50.5$[1767500/35000]
selling and admin	11311500	11714000	402500	11.5$[402500/35000]

material cost per unit =$89.5*201000units = 17989500$

so whole cost is variable 89.5$

labor cost = 25*201000=5025000

so whole cost is variable $25

overhead cost = 201000*50.5

=10150500$

total cost = fixed cost+variable cost

21650500= fixed + 10150500

fixed cost =21650500-10150500

=11500000$

selling and administration = 11.5*201000=2311500

11311500 =fixed + 2311500

fixed = 9000000$

cost for 25500unit

SPECIAL ORDER PROFIT

Revenue	5100000	[200*25500]
direct material	(2282250)	[89.5*25500]
labor	(637500)	[25*25500]
overhead [variable part only]	(1287750)	[50.5*25500]
selling and administrative [variable part only]	(293250)	[11.5*25500]
Additional shipping cost	(63750)	[2.50*25500]
set up cost	(275000)
special equipment	(255000)
net income(Loss)	5500$	[5100000-2282250-637500-1287750-293250-275000-255000-63750]

profit = 5500$