Determine the financial implications of accepting the order

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Question - High-Low Cost Estimation - Autoliv produces air bag systems that it sells to automobile manufacturers throughout the world. Assume the company has a capacity of 50 million units per year, it is currently producing at an annual rate of 40 million units. Autoliv has received an order from a Japanese manufacturer to purchase 100,000 units at $65 each. Budgeted costs for 40 million and 45 million units are as follows:

(in thousands, except costs per unit)

40 Million Units

45 Million Units

Manufacturing costs

 

 

Direct materials

$560,000

$630,000

Direct labor

220,000

247,500

Factory overhead

1,780,000

1,822,500

Total

2,560,000

2,700,000

Selling and administrative

1,120,000

1,125,000

Total

$3,680,000

$3,825,000

Costs per unit

 

 

Manufacturing

$64.00

$60.00

Selling and administrative

28.00

25.00

Total

$92.00

$85.00

Sales to auto manufacturers are priced at $120 per unit, but the sales manager believes the company should aggressively seek the Japanese business even if it results in a loss of $20 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 $2,000,000 loss ($20 × 100,000) it would incur if the order is accepted.

Required - Determine the financial implications of accepting the order.

Reference no: EM133076999

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