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Question - Huang Automotive is presently operating at 75% of capacity. The company recently received an offer from a Korean truck manufacturer to purchase 27,000 units of a power steering system component for $195 per unit. Peter Wu, vice-president of sales, notes that although there will be an additional $2.25 shipping cost for each component, he thinks that accepting the order will get the company's "foot in the door" of an expanding international market.
To determine variable and fixed costs, Huang's accountant used the high-low method with the following production and cost information for the last two years:
203,000 units
229,000 units
Direct material costs
$18,067,000
$20,381,000
Direct labor costs
5,785,500
6,526,500
Overhead costs
22,563,500
23,980,500
Selling and administrative costs
11,036,000
11,348,000
Total costs
$57,452,000
$62,236,000
Total costs per unit
$283.01
$271.77
T.J. Chan, vice-president of engineering, feels that any new market should first show its profitability and that the $195 per unit offer is not only below the regular $270 selling price, but it's below the unit cost of the component. She also points out that there will be additional setup costs of $285,000 and that Huang will have to lease some special equipment for $300,000.
REQUIRED - Using the high-low method to determine cost behavior, what would the expected profit be on the special order (use a negative sign for a loss)?
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