pecial Order: High-Low Cost Estimation

Autoliv produces air bag systems that it sells to automobile manufacturers throughout the world. Assume the company has a capacity of 50 million units per year, it is currently producing at an annual rate of 40 million units. Autoliv has received an order from a Japanese manufacturer to purchase 100,000 units at $65 each. Budgeted costs for 40 million and 45 million units are as follows:

(in thousands, except costs per unit)40 Million Units45 Million UnitsManufacturing costsDirect materials$ 560,000$ 630,000Direct labor220,000247,500Factory overhead1,780,0001,822,500Total2,560,0002,700,000Selling and administrative1,120,0001,125,000Total$ 3,680,000$ 3,825,000Costs per unitManufacturing$ 64.00$ 60.00Selling and administrative28.0025.00Total$ 92.00$ 85.00

Sales to auto manufacturers are priced at $120 per unit, but the sales manager believes the company should aggressively seek the Japanese business even if it results in a loss of $20 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 $2,000,000 loss ($20 100,000) 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.)