1. Assume a division of Hewlett-Packard currently makes 10,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $34 per board, consisting of variable costs per unit of $24 and fixed costs per unit of $10. Further assume Sanmina-SCI offers to sell Hewlett-Packard the 10,000 circuit boards for $34 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard's suppliers for $27,000 per year. In addition, $5 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.
Calculate the net benefit (cost) to HP of outsourcing the component from Samina-SCI.
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:
| 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 $18 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.