Question
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
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 Units | 45 Million Units |
---|---|---|
Manufacturing costs | ||
Direct materials | $ 560,000 | $ 630,000 |
Direct labor | 220,000 | 247,500 |
Factory overhead | 1,780,000 | 1,822,500 |
Total | 2,560,000 | 2,700,000 |
Selling and administrative | 1,120,000 | 1,125,000 |
Total | $ 3,680,000 | $ 3,825,000 |
Costs per unit | ||
Manufacturing | $ 64.00 | $ 60.00 |
Selling and administrative | 28.00 | 25.00 |
Total | $ 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.)
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.
$Answer
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