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 $7.00 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 |
2,280,000 |
|
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 $25 per unit, but the sales manager believes the company should aggressively seek the German business even if it results in a loss of $5.75 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 $345,000 loss ($5.75 × 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.
Sell or Process Further
Port Allen Chemical Company processes raw material D into joint products E and F. Raw material D costs $4 per liter. It costs $100 to convert 100 liters of D into 60 liters of E and 40 liters of F. Product F can be sold immediately for $4 per liter or processed further into Product G at an additional cost of $6 per liter. Product G can then be sold for $14 per liter.
Determine whether Product F should be sold or processed further into Product G. Calculate the net benefit (cost) of further processing.
per liter
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