Special Order: High-Low Cost Estimation (LO1, 2, 3)

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 $9.00 each. Budgeted costs for 180,000 and 240,000 units are as follows:

180,000 Units 240,000 Units Manufacturing costs DinectamatenialSan =a scree tats e «re $ 450,000 $ 600,000 DirectilabO ler aesteaecm ec seeesn h ee 315,000 420,000 FACLOM OVEN CAC eectam tais .ee o rs 1,215,000 1,260,000 TIGA) SS 1-6 ado tec eee eee 1,980,000 2,280,000 Selling and administrative ......... 765,000 780,000 WOE nse: are nee ee $2,745,000 $3,060,000 Costs per unit Manufacturing: samma eei.me a $11.00 $ 9.50 Selling and administrative........ 4.25 3:25 SOLA tee eee as Setar he es Oo225 $12.75 Sales to North American manufacturers are priced at $20 per unit, but the sales manager believes the company should aggressively seek the German business even if it results in a loss of $3.75 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 $225,000 loss ($3.75

< 60,000) it would incur if the order is accepted.

Required

a. Determine the financial implications of accepting the order.

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.