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 24,500 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 $2.25 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:

199,000 units     223,000 units    

Direct material costs $15,920,000      $17,840,000     

Direct labor costs 5,870,500      6,578,500     

Overhead costs 25,442,500      26,822,500     

Selling and administrative costs 7,389,000      7,653,000     

Total costs $54,622,000      $58,894,000     

Total costs per unit $274.48      $264.10     

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 $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 $215,000 and that Huang will have to lease some special equipment for $235,000.

Explanation / Answer

Fixed cost is irrelevant while making decision as to accept the offer or not asit will be incurred whether it is accepted or not.

mixed cost= change in cost/change in output

The offer should not be accepted as it wil result in incremental loss of 88625 (loss) .

calculation variable cost per unit Direct material (Variable cost since constant in per unit) 15920000/199000 80 Direct labor cost(Variable cost since constant in per unit) 5870500/199000 29.5 Overhead cost (mixed cost since neither constant in per unit nor in total) [26822500-25442500]/[223000-199000] 57.5 selling and administrative cost [7653000-7389000]/[223000-199000] 11 Total variable cost 178

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