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 23,000 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.

Direct material costs Direct labor costs Overhead costs Selling and administrative costs Total costs Total costs per unit 195,000 units $15,990,000 4,387,500 21,115,000 12,242,500 $53,735,000 $275.56 227,000 units $18,614,000 5,107,500 22,939,000 12,610,500 $59,271,000 $261.11

Explanation / Answer

In case of mixed cost ,only variable cost is relevant ,Fixed cost is irrelevant as it will be incurred whether offer is accepted or not

Gross profit = 200- 176 = 24

Total gross profit = 24 *23000 = 552000

Less:set up cost                      (265000)

equipment cost                        (225000)

profit                                      62000

material cost   (15990000/195000) = 82 variable 82 Labor cost    (4387500 / 195000 ) ,variable 22.5 Overhead cost - mixed =[22939000- 21115000]/[227000-195000] = [1824000/32000] 57 selling cost-mixed cost [12610500 -12242500 ]/[227000-195000] = 368000/32000 11.5 shipping cost 3 Total cost 176

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