Question 1:

Special Order: High-Low Cost Estimation

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 Units240,000 Units

Manufacturing costs

Direct materials$ 450,000$ 600,000

Direct labor315,000420,000

Factory overhead1,215,000

________________________________________1,260,000

________________________________________

Total1,980,0002,280,000

Selling and administrative765,000

________________________________________780,000

________________________________________

Total$ 2,745,000

________________________________________$ 3,060,000

________________________________________

Costs per unit

Manufacturing$ 11.00$ 9.50

Selling and administrative4.25

________________________________________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.

$Answer

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