Question

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 136,000 tires. Brightstone presently produces and sells 104,000 tires for the North American market at a price of $99 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 16,000 tires for $79.15 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Direct materials	$38
Direct labor	14
Factory overhead (60% variable)	23
Selling and administrative expenses (30% variable)	20
Total	$95

Brightstone pays a selling commission equal to 5% 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 $5 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $83,200.

a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. If an amount is zero, enter zero "0". If required, round interim calculations to two decimal places.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
January 21
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling and admin. expenses
Shipping costs
Certification costs
Income (Loss)	$	$	$

Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors.

b. What is the minimum price per unit that would be financially acceptable to Brightstone? Round your answer to two decimal places.
$per unit

Answer 1

Solution a:

Differential Analysis Reject order (Alt 1) or Accept Order (Alt 2) January 21
Particulars	Reject order (Alt 1)	Accept order (Alt 2)	Differential effect on income (Alt 2)
Revenues	$0.00	$12,66,400.00	$12,66,400.00
Variable costs:
Direct material	$0.00	$6,08,000.00	$6,08,000.00
Direct labor	$0.00	$2,24,000.00	$2,24,000.00
Variable factory Overhead	$0.00	$2,20,800.00	$2,20,800.00
Variable selling and administrative expenses [($20*30% - $99*5%)*16000]	$0.00	$16,800.00	$16,800.00
Shipping cost	$0.00	$80,000.00	$80,000.00
Certification cost	$0.00	$83,200.00	$83,200.00
Income (Loss)	$0.00	$33,600.00	$33,600.00

The order should be accepted since there is differential income of $33,600.

Solution b:

Minimum Price per unit = Selling Price per unit - Differential income per unit

= $79.15 - $33600/16000

= $79.15 - $2.10

= $77.05