This is a special order problem that also requires that you use the high low met

Question

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 26,000 units of a power steering system component for $195 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $2.50 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 209,000 units $18,705,500 5,225,000 22,972,500 10,185,500 $57,088,500 $273.15 233,000 units $20,853,500 5,825,000 24,232,500 10,413,500 $61,324,500 $263.20 T.J. Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $195 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 $260,000 and that Huang will have to lease some special equipment for $245,000 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)? Submlt Answer Tries 3/8 Previous Tries

Explanation / Answer

Direct material cost

Variable cost Fixed cost

Direct material cost

89.5 0 Direct labor 25 Overhead cost 52.5 12000000 Selling and adm cost 9.5 8200000 total cost 176.5 20200000 High low method units cost high 233000 24232500 low -209000 -22972500 Difference 24000 1260000 Variable cost per unit = 1260000/24000= 52.5 Fixed cost = 2423500-(233000*52.5) 12000000 Selling and administrative = (10413500-10185500)/24000= 9.5 Fixed cost =(10413500-(233000*9.5) 8200000 Expected profit on special oder sale price 195 total variable cost -176.5 Shipping cost -3 contribution 15.5 contribution margin(26000*15.5) 403000 less Additional fixed cost Set up cost -260000 lease cost -245000 Expected profit on special oder -102000

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