Special Order: High-Low Cost Estimation SafeRide, Inc. produces air bag systems that it sells to...


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 Units 240,000 Units
Manufacturing costs
Direct materials $450,000$600,000
Direct labor 315,000420,000
Factory overhead 1,215,0001,260,000
Total 1,980,0002,280,000
Selling and administrative 765,000780,000
Costs per unit
Selling and administrative 4.253.25

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 x 60,000) it would incur if the order is accepted.

(a) Determine the finanicial implications of accepting the order.

(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.

Fixed Costs:

Fixed costs do not increase with the amount of product produced, unless the relevant range is exceeded. Relevant range and capacity can be thought of as the same thing in this case.

Answer and Explanation: 1

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(a) If the order is accepted the company will immediately lose $225,000 ($3.75 x 60,000). Unless management believes this could open up a hug...

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Fixed Costs: Definition, Formula & Examples


Chapter 3 / Lesson 14

What is a fixed cost? Learn the fixed cost definition and how to calculate it using the fixed cost formula. Compare fixed vs. variable costs and see fixed costs examples in business.

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