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 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 $3.00 shipping cost for each component, he thinks that accepting the order will get the company's "foot in the doort of an expanding international market. Huang's production and cost information for the last two years for the component are as follows: 191,000 units 227,000 units $18,500,500 5,448,000 27,120,000 10,524,000 55,202,500$61,592,500 $271.33 Direct material costs Direct labor costs Overhead costs Selling and administrative $15,566,500 4,584,000 24,960,000 10,092,000 costs Total costs Total costs per unit $289.02 T.J. 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 $225,000 and that Huang will have to lease some special equipment for $280,000. 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)? Submit Answer Tries 0/8

Explanation / Answer

There would be an expected loss of $262,750 on the special order.

Note: Fixed manufacturing overheads and selling and administrative overheads are not considered since they remain unaffected by the acceptance or rejection of the special order since Huang has unutilized capacity and are hence irrelevant.

Calculations:

Variable overhead costs: ($27,120,000 - $24,960,000) / (227,000 - 191,000) = $2,160,000 / 36,000 = $60 per unit

Variable selling and administrative costs = ($10,524,000 - $10,092,000) / (227,000 - 191,000) = $432,000 / 36,000 = $12 per unit

Selling price per unit $ 190 Variable costs: Direct materials 81.5 Direct labor 24 Variable overhead costs 60 Variable selling and administrative costs 12 Variable additional shipping costs 3 Total variable costs 180.5 Contribution per unit $ 9.50 Number of units ordered 25500 Total contribution $ 242250 Less: Additional setup costs 225000 Less: Cost of leasing special equipment 280000 Expected profit on special order $ -262750

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