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 22,000 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 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 207,000 units $17,077,500 6,106,500 24,609,500 10,373,500 $58,167,000 $281.00 229,000 units $18,892,500 6,755,500 25,896,500 10,604,500 $62,149,000 $271.39 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 $270 selling price, but it's below the unit cost of the component. She also points out that there will be additional setup costs of $230,000 and that Huang will have to lease some special equipment for $275,000. 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

Only variable cost is relevant while making decision as fixed cost remain constant irrespective whether offer is accepted or not

Variable cost per unit =Change in total cost/change in unit

      =[62149000-58167000]/[229000-207000]

     = 3982000/22000

         = $ 181 per unit

EXpected profit = -373000

Incremental revenue [22000*190] 4180000 less:Incremental variable cost [181*22000] -3982000 Shipping cost [3*22000] -66000 setup cost -230000 leasing cost -275000 Incremental profit /(loss) -373000

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