pecial 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
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
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 | |
|---|---|---|
| Direct materials | $450,000 | $600,000 |
| Direct labor | 315,000 | 420,000 |
| Factory |
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) Determine the financial implications of accepting the order. (Hint: Use the high-low method to determine variable costs per unit.)
Accepting the offer will Answerdecreaseincrease profits by $Answer
(b) How would your analysis differ if the company were operating at capacity? Determine the advantage or disadvantage of accepting the order under full-capacity circumstances.
Use a negative sign with your answer to indicate a net disadvantage, if applicable.
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