Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 30,000 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 $3.00 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. To determine variable and fixed costs, Huang's accountant used the high-low method with the following production and cost information for the last two years: Direct material costs Direct labor costs Overhead costs 190,000 units 223,000 units $15,960,000 $18,732,000 5,320,000 6,244,000 24,020,000 25,934,000 7,630,000 $276.84 $52,600,000 $58,540,000 $262.51 Selling and administrative costs 7,300,000 Total costs Total costs per unit 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 $240,000. 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)?
Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 30,000 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 $3.00 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. To determine variable and fixed costs, Huang's accountant used the high-low method with the following production and cost information for the last two years: Direct material costs Direct labor costs Overhead costs 190,000 units 223,000 units $15,960,000 $18,732,000 5,320,000 6,244,000 24,020,000 25,934,000 7,630,000 $276.84 $52,600,000 $58,540,000 $262.51 Selling and administrative costs 7,300,000 Total costs Total costs per unit 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 $240,000. 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)?
Principles of Cost Accounting
17th Edition
ISBN:9781305087408
Author:Edward J. Vanderbeck, Maria R. Mitchell
Publisher:Edward J. Vanderbeck, Maria R. Mitchell
Chapter10: Cost Analysis For Management Decision Making
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Transcribed Image Text:Huang Automotive is presently operating at 75% of capacity. The company recently received
an offer from a Korean truck manufacturer to purchase 30,000 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 $3.00 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.
To determine variable and fixed costs, Huang's accountant used the high-low method with the
following production and cost information for the last two years:
Direct material costs
Direct labor costs
Overhead costs
190,000 units 223,000 units
$15,960,000 $18,732,000
5,320,000
6,244,000
24,020,000 25,934,000
7,630,000
$276.84
$52,600,000 $58,540,000
$262.51
Selling and administrative costs 7,300,000
Total costs
Total costs per unit
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
$240,000.
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)?
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