Special Order: High-Low Cost Estimation

Safe Ride, 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. Safe Ride, 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

Direct materials $ 450,000 $ 600,000

Direct labor 315,000 420,000

Factory overhead 1,215,000

________________________________________ 1,260,000

Total 1,980,000 2,280,00

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 $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.

(a) Calculate the net benefit (cost) of accepting the order from the German business.

(b) Calculate the net benefit (cost) of accepting the order from the German business, assuming the company is operating at full capacity.