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
