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 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 $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:

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 $250 selling price, but it's below the unit cost of the component. She also points out that there will be additional setup costs of $245,000 and that Huang will have to lease some special equipment for $260,000.

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

197,000 units     240,000 units     Direct material costs $15,760,000      $19,200,000      Direct labor costs 5,220,500      6,360,000      Overhead costs 21,335,000      23,700,000      Selling and administrative costs 7,964,000      8,480,000      Total costs $50,279,500      $57,740,000      Total costs per unit $255.23      $240.58     

Explanation / Answer

In developing a confidence interval for the population standard deviation , we make use of the fact that the sampling distribution of the sample standard deviation S is not the normal distribution or the t distribution, but rather a right-skewed distribution called the chi-square distribution, which (for this procedure) has n – 1 degrees of freedom.

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