Question

Brightstone Tire and Rubber Company has capacity to produce 221,000 tires. Brightstone presently produces and sells 169,000 tires for the North American market at a price of $114 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 26,000 tires for $93.6 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:
Direct materials $54
Direct labor 24
Factory overhead (62% variable) 24
Selling and administrative expenses (44% variable) 25
Total $127.00
Brightstone pays a selling commission equal to 4% of the selling price on North American orders, which is included in the variable portion of the selling and administrative expenses. However, this special order would not have a sales commission. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $7.65 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $165,424.
Required:
A. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B. Determine whether the company should reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors
C. What is the minimum price per unit that would be financially acceptable to Brightstone?

Answer 1

Answer and Explanation:

A. The preparation of the differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors is presented below:

                                            Differential analysis

                        Reject (Alternative 1) or accept (Alternative 2)

                                                             Jan 21

Particulars     Reject order        Accept order    Differential effect on income

                    (Alternative 1)     (Alternative 2)     (Alternative 2)

Revenues

(26,000 tires × $93.6)             $2,433,600          $2,433,600

Less: cost

direct material

(26,000 tires × $54)               -$1,404,000            -$1,404,000

Direct labor

(26,000 tires × $24)               -$624,000               -$624,000

Variable factory overhead

(26,000 tires × $24 × 0.62)   -$386,880               -$386,880

Variable selling and admin expenses

(26,000 tires × $25 × 0.44) - ($114 × 4%)

                                              -$167,440                -$167,440

Shipping cost

(26,000 tires × $7.65)           -$198,900                 -$198,900

Certification cost                  -$165,424                  -$165,424

Income or loss                       -$513,044                   -$513,044

B. As we can see that there is a loss of   -$513,044 so the special order should be rejected

C. The minimum price is

= Selling price - differential income per unit

= $93.6 - (-$513,044 ÷ 26,000 tires)

= $93.6 - (-$19.73)

= $113.33