Solved by verified expert :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
315,000
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 $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.
