Question

Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 24,500 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. To determine variable and fed costs, Huang's accountant used the high-low method with the following production and cost information for the last two years 210,000 units 230,000 units $20,125,000 Direct material costs $18,375,000 5,635,000 Direct labor costs 23.305,000 Overhead co 5,145,000 22,235.000 9,95.000 $55,740,000 $265.43 Seing and administrative costs Total costs Total coste per unit 10,155,000 $59,220,000 T). Chan, vice present angen tes that any new m ethod for how the unit cost of the component. She also points out that there will be additional profit and that the 200 per offer is not only below the rear 260 g rice but cost of $270,000 and that Huang will have to lose some special equipment for $300,000 negative for REQUIRED 6 tries 1. Using the high low method to determine cost behavior, what would the expected profit be on the special orderua

Answer 1

Units	210,000	230,000
Direct material	18,375,000	20,125,000
Direct Labor	5,145,000	5,635,000
Overhead costs	22,235,000	23,305,000
Selling and Admin cost	9,985,000	10,155,000
Total cost	55,740,000	59,220,000
Using high low method, variable cost per unit = Difference in Cost/Difference in Volume
Overhead	53.5	per unit
Selling and Admin Cost	8.5	per unit
Direct material and direct labor are variable costs
Since there is spare capacity, only incremental costs are relevant for the special order
Calculation of profit from special order:
Revenue	4,900,000
Less: costs
Direct material	2,143,750
Direct Labor	600,250
Overhead costs	1,310,750
Selling and Admin cost	208,250
Shipping cost	55,125
Setup costs	270,000
Lease cost	300,000
Total cost	4,888,125
Profit from special order	11,875
Should be accepted

230000 =B2*C1/B1 =B3*C1/B1 23305000 10155000 =SUM(C2:05) 1 Units 210000 2 Direct material 18375000 3 Direct Labor 5145000 4 Overhead costs 22235000 5 Selling and Admin cost 9985000 6 Total cost =SUM(B2:35) 7 8 Using high low method, variable cost per unit = Difference in Cost/Difference in V 9 Overhead =(C4-B4)/(C1-B1) 10 Selling and Admin Cost =(C5-B5)/(C1-B1) 11 12 Direct material and direct labor are variable costs 13 Since there is spare capacity, only incremental costs are relevant for the special o per unit per unit 14 =24500*200 15 Calculation of profit from special order: 16 Revenue 17 Less: costs 18 Direct material 19 Direct Labor 20 Overhead costs 21 Selling and Admin cost 22 Shipping cost 23 Setup costs 24 Lease cost 25 Total cost 26 Profit from special order 27 Should be accepted =B2*24500/$B$1 =B3*24500/$B$1 =B9*24500 =B10*24500 -2.25*24500 270000 300000 =SUM(B18:B24) =B16-B25