This is a special order problem that also requires that you use the high low met

Question

This is a special order problem that also requires that you use the high low method to estimate some cost function parameters. For guidance, you may want to review the high-low method lectures in Module 1 and the high-low study problem solutions. As with almost all of the analyses that we have done, determining variable and fixed costs, and knowing what to do with them, is critical.
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Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 26,500 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 $3.00 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 $250,000.

Required
1. What would the expected profit be on the special order (use a negative sign for a loss)?

198,000 units     228,000 units     Direct material costs $16,929,000      $19,494,000      Direct labor costs 4,653,000      5,358,000      Overhead costs 22,093,000      23,698,000      Selling and administrative costs 11,178,000      11,508,000      Total costs $54,853,000      $60,058,000      Total costs per unit $277.04      $263.41     

Explanation / Answer

there for company show a loss of 5706565 on the special order

present operating capacity of the company=75% offer from korean truck manufacturing company=26500 unit @200 per unit additional shipping cost=3 $ there for present cost for production =228000/75%=304000 production cost per unit=351.21 there for total production cost for 26500 unit=26500 X351.21=9307065 calculation of profit and loss from new offr particular Amount Sales(a) 26500 X200                        5,300,000.00 cost(b) total production cost                        9,307,065.00 additional shipping cost 26500 X3                              79,500.00 additional set up cost                              30,000.00 280000 -lease cost 250000 loss from reducing selling price 26500 X60                        1,590,000.00 total cost(b)                      11,006,565.00 profit = (a)-(b)                      (5,706,565.00)

there for company show a loss of 5706565 on the special order

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