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
$199 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:
194,000 units | 223,000 units | |
Total costs | $55,277,000 | $60,221,500 |
Total costs per unit | $284.93 | $270.05 |
T.J. Chan, vice-president of engineering, feels that any new market
should first show its profitability and that the $199 per unit
offer is not only below the regular $260 selling price, but it's
below the unit cost of the component. She also points out that
there will be additional setup costs of $285,000 and that Huang
will have to lease some special equipment for $205,000.
REQUIRED [6 tries]
1. Using the high-low method to budget costs of the special order,
what would the expected profit on the special order be (use a
negative sign for a loss)?
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