Question

This is a special order problem that also requires that you use the high low method to estimate some cost function parameters, so you may want to review the high-low method lectures in Module 1. 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 23,500 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 $2.50 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: 202,000 units 232,000 units Direct material costs $16,867,000 $19,372,000 Direct labor costs 5,454,000 6,264,000 Overhead costs 23,701,000 25,216,000 Selling and administrative costs 9,022,000 9,352,000 Total costs $55,044,000 $60,204,000 Total costs per unit $272.50 $259.50 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 $270,000 and that Huang will have to lease some special equipment for $240,000. 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)? Large numbers should be rounded to the nearest dollar and small numbers should be rounded to the nearest cent. ***The answer is not -$18,250***

Answer 1

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1.			Year 2	Year 1
	Units		202000	232000
	Direct Material		$       16,867,000	$                 19,372,000
	Direct Labor		$          5,454,000	$                   6,264,000
	Overhead		$       23,701,000	$                 25,216,000
	Total Cost		$       46,022,000	$                 50,852,000
	Diff in Total Cost	A	$          4,830,000
	Diff in Units	B	30,000
	Variable Cost	A/B	$                161.00
			Per Unit	Total for 23500 Units
	Special Order Selling Price		$                      195	$                   4,582,500
	Less: Variable Cost @ 161		$                      161	$                   3,783,500
	Less: Shipping Cost		$                       2.5	$                         58,750
	Less: Set Up Cost			$                       270,000
	Less: Lease			$                       240,000
	Profit from Special Order			$                       230,250