(-) Timer Notes à \'es Info Course Contents >> PROBLEM #5 [SPECIAL ORDER DECISIO
ID: 2563313 • Letter: #
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(-) Timer Notes à 'es Info Course Contents >> PROBLEM #5 [SPECIAL ORDER DECISION] Evaluate Feedback -Print 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. 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 $190 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 Direct material costs Direct labor costs Overhead costs Selling and administrative costs Total costs Total costs per unit 190,000 units $15,295,000 3,800,000 24,210,000 10,995,000 $54,300,000 $285.79 235,000 units $18,917,500 4,700,000 26,865,000 11,467,500 $61,950,000 $263.62 TJ Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $190 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 $215,000 and that Huang will have to lease some special equipment for $200,000. Required 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)?Explanation / Answer
Total cost for 190,000 units = $54,300,000
Total cost for 235,000 units = $61,950,000
Using high low method, Variable cost per unit = ($61,950,000-$54,300,000)/(235,000-190,000) = $170 per unit
Additional shipping cost per unit for special order = $2.25
Variable cost per unit for special order = $2.25 + $170 = $172.25
Selling price per unit for special order = $190
Contribution margin per unit for special order = $190 - $172.25 = $17.75 per unit
Number of units in special order = 25,500 units
Contribution margin for special order = $17.75 * 25,500 units = $452,625
Additional fixed cost = $215,000 + $200,000 = $415,000
Expected profit due to special order = $452,625 - $415,000 = $37,625
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