Question

Brightstone Tire and Rubber Company has capacity to produce 179,000 tires. Brightstone presently produces and sells 137,000 tires for the North American market at a price of $93 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 21,000 tires for $76.85 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.
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:

A. Reject (Alternative 1) $0

Accept (Alternative 2) -$815,584

Differential effect Income (Alternative 2) -$815,584

B. Goodman should REJECT the special order from Euro Motors

C.$115.69

Explanation:

a. Preparation of a differential analysis dated January 21

DIFFERENTIAL ANALYSIS

Reject (Alternative 1) Accept (Alternative 2) Differential effect Income (Alternative 2)

Revenues $0 $1,613,850 $1,613,850

(21,000 tires × $76.85 per tire)

Costs:

Direct materials 0 –$1,134,000 $1,134,000

(21,000 tires × $54 per tire)

Direct labor 0 –$504,000 $504,000

(21,000 tires × 24 per tire)

Variable factory overhead 0 –$312,480 $312,480

[21,000 tires × ($24 per tire × 62%)]

Variable selling and admin.

expenses 0 –$152,880 $152,880

21,000 tires × [(25 per tire × 44%) – ($93 × 4%)]

Shipping costs 0 –$160,650 $160,650

(21,000 tires × $7.65 per tire)

Certification costs 0 –$165,424 –$165,424

Income (Loss) $0 -$815,584 -$815,584

B. Based on the above Differentials analysis Brightstone should REJECT the special order from Euro Motors.

C. Calculation to determine minimum price per unit that would be financially acceptable to Brightstone

Minimum price per unit =$76.85-(-$815,584/21,000)

Minimum price per unit =$76.85-(-$38.84)

Minimum price per unit=$115.69

Therefore minimum price per unit that would be financially acceptable to Brightstone is $115.69