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:

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.

180,000 Units 240,000 Units Manufacturing costs Direct materials $ 450,000 $ 600,000 Direct labor 315,000 420,0 00 Factory overhead 1,215,000 1,250,000 Total 1,980,000 2,280,000 Selling and administrative ?65,000 730'000 Total $ 2,745,000 $ 3,060,000 Costs per unit Manufacturing $ 11.00 $ 9.50 Selling and administrative 4'25 3'25 $ 15.25 $ 12.?5 Total