In: Accounting
Special Order: High-Low Cost Estimation
SafeRide, Inc. produces air bag systems that it sells to North
American automobile manufacturers. Although the company has a
capacity of 300,000 units per year, it is currently producing at an
annual rate of 180,000 units. SafeRide, Inc. has received an order
from a German manufacturer to purchase 60,000 units at $7.00 each.
Budgeted costs for 180,000 and 240,000 units are as follows:
180,000 Units | 240,000 Units | |
---|---|---|
Manufacturing costs | ||
Direct materials | $450,000 | $600,000 |
Direct labor | 315,000 | 420,000 |
Factory overhead | 1,215,000 | 1,260,000 |
Total | 1,980,000 | 2,280,000 |
Selling and administrative | 765,000 | 780,000 |
Total | $2,745,000 | $3,060,000 |
Costs per unit | ||
Manufacturing | $11.00 | $9.50 |
Selling and administrative | 4.25 | 3.25 |
Total | $15.25 | $12.75 |
Sales to North American manufacturers are priced at $25 per
unit, but the sales manager believes the company should
aggressively seek the German business even if it results in a loss
of $5.75 per unit. She believes obtaining this order would open up
several new markets for the company's product. The general manager
commented that the company cannot tighten its belt to absorb the
$345,000 loss ($5.75 × 60,000) it would incur if the order is
accepted.
(a) Calculate the net advantage (disadvantage) of accepting the
order from the German business.
Use a negative sign with your answer to indicate a net disadvantage, if applicable.
$Answer
(b) Calculate the net advantage (disadvantage) of accepting the
order from the German business, assuming the company is operating
at full capacity.
Use a negative sign with your answer to indicate a net disadvantage, if applicable.
$Answer