Special Order: High-Low Cost Estimation SafeRide, Inc. Produ ✓ Solved
Special Order: High-Low Cost Estimation SafeRide, Inc. produces
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: Manufacturing costs are Direct materials $450,000, Direct labor $315,000, Factory overhead $1,215,000, Total $1,980,000, Selling and administrative $765,000, Total $2,745,000. For 240,000 Units: Manufacturing costs are Direct materials $600,000, Direct labor $315,000, Factory overhead $1,260,000, Total $2,280,000, Total costs are $3,060,000. Costs per unit are Manufacturing $11.00, Selling and administrative $4.25, Total $15.25 for 180,000 units and Manufacturing $9.50, Selling and administrative $3.25, Total $12.75 for 240,000 units. 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.
Paper For Above Instructions
SafeRide, Inc. produces air bag systems and has received a significant special order from a German manufacturer. To determine whether to accept this special order, we must assess the net benefit or cost of fulfilling the order by evaluating both scenarios: (a) accepting the order at current production levels and (b) accepting the order at full production capacity. We will also analyze whether Product F from Port Allen Chemical Company should be sold as is or processed further into Product G.
Analysis of SafeRide, Inc. Special Order
(a) Net Benefit (Cost) of Accepting the Order
The order from the German manufacturer consists of 60,000 units at a selling price of $7.00 each, which amounts to a total revenue of:
Total Revenue = Selling Price × Quantity = $7.00 × 60,000 = $420,000
Next, we need to calculate the incremental costs associated with this special order. The most relevant costs are the variable costs, which will change as a result of accepting this order. According to the data provided, we already have a cost structure in place:
- Manufacturing costs for 180,000 units:
- Direct materials: $450,000
- Direct labor: $315,000
- Factory overhead: $1,215,000
- Total manufacturing cost: $1,980,000
- Cost per unit produced: Manufacturing cost for 180,000 units = $1,980,000 / 180,000 = $11.00
For the special order of 60,000 units, assuming variable costs remain proportionate, the manufacturing costs would be:
Incremental Cost for Special Order = Cost per unit × Quantity = $11.00 × 60,000 = $660,000
Now calculating the loss from accepting the order, we compare the total revenue with the incremental cost:
Net Benefit (Cost) = Total Revenue - Incremental Cost = $420,000 - $660,000 = -$240,000
Thus, accepting the special order will result in a net loss of $240,000.
(b) Net Benefit (Cost) at Full Capacity
Assuming SafeRide, Inc. is operating at full capacity (300,000 units), it will have to forego some other sales to fulfill this order. The loss per unit on this special order remains $5.75, but it is now crucial to consider the lost contribution of the units that would not be produced for other customers:
Total loss = $5.75 × 60,000 = $345,000
In this scenario, the company still incurs the incremental costs we previously calculated ($660,000). Hence, the total effective loss when considering capacity constraints becomes significantly larger:
Total Effective Loss = Lost Contribution + Incremental Costs = $345,000 + $660,000 = $1,005,000
Analysis of Port Allen Chemical Company: Sell or Process Further
Port Allen Chemical Company processes raw material D into joint products E and F. The cost structure for processing is as follows:
- Raw material D: $4 per liter
- Processing cost (100 liters): $100 to convert to 60 liters of E and 40 liters of F.
- Product F can be sold immediately for $4 per liter.
- Alternatively, Product F can be further processed into Product G at an additional cost of $6 per liter and sold for $14 per liter.
To determine whether to sell F or process it further into G, we calculate the relevant costs and revenues:
Revenues and Costs from Selling Product F
Revenue from selling Product F = Selling price × Quantity
Let's assume that all 40 liters are sold:
Revenue from F = $4 × 40 = $160
Cost for F = Production share of raw material + processing cost proportion:
Cost for F = (40 liters × $4) + (40 liters / 60 liters × $100) = $160 + $66.67 = $226.67
Net Benefit from Selling F = $160 - $226.67 = -$66.67
Revenues and Costs from Processing Product F into G
Processing further into G will cost an additional $6 per liter on the remaining 40 liters:
Cost to Process F = $6 × 40 = $240
Potential Revenue from Selling G = $14 × 40 = $560
Net Benefit from Processing to G = $560 - ($240 + $160) = $560 - $400 = $160
Conclusion on Port Allen's Decision
The analysis suggests that Product F should be further processed into Product G since it generates a higher net benefit of $160 compared to selling F immediately, which results in a net loss.
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