Question

Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 21,500 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 $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: 192，000 units; 225,000 uints

direct material costs $17,280,000;$20,250,000

direct labor costs 5,184,000; 6,075,000

overhead costs 21,348,000 ;23,212,500

selling and administrative costs 7,232,000; 7,512,500

total costs $51,044,000 ;$57,050,000

total costs per unit $265.85 ;$253.56

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 $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 $240,000 and that Huang will have to lease some special equipment for $210,000. 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)?

Answer 1

Previous year information (A)	192000	225000
Direct material(B)	17280000	20250000
Material cost per unit (B/A))	90.00	90.00
Direct Labour ("C)	5184000	6075000
Labour cost per unit (C/A)	27.00	27.00
Overhead cost	21348000	23212500
Variable overhead = Change in Cost / Change in Unit
Change in unit (225000-192000)	33000
Change in Cost (23212500-21348000)	1864500
Variable overhead	56.50
Selling and administrative cost
Variable selling cost
Change in unit (225000-192000)	33000
Change in cost	280500
Variable selling over head	8.50
*Fixed cost is not relevent for decision making
*Selling and variable overhead which is fixed is not relevent in decision making
Statement of relevent cost
	Rate	Unit	Amount
Direct Material	90.00	21500	1935000
Direct Labour	27.00	21500	580500
Variable overhead cost	56.50	21500	1214750
Variable selling and administrative cost	8.50	21500	182750
Additional shipping cost	2.25	21500	48375
Fixed cost related to decision
Additional setup cost			240000
Leasing of special equipent			210000
Total cost			4411375
Total revenue (190*21500)			4085000
Loss from the offer			-326375