Question

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 162,000 tires. Brightstone presently produces and sells 124,000 tires for the North American market at a price of $103 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 19,000 tires for $86.55 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Direct materials	$39
Direct labor	14
Factory overhead (70% variable)	24
Selling and administrative expenses (30% variable)	21
Total	$98

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 $6 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $104,500.

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

Decision on Accepting Additional Business

a.Differential Analysis:

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	$12,772,000	$14,416,450	$1,644,450
Costs:
Direct materials	4,836,000	5,577,000	741,000
Direct labor	1,736,000	2,002,000	266,000
Variable factory overhead	2,083,200	2,402,400	319,200
Variable selling and admin. expenses	781,200	803,050	21,850
Shipping costs	0	114,000	114,000
Certification costs	0	104,500	104,500
Income (Loss)	$3,335,600	$3,413,500	$77,900

b.Minimum price per unit = Cost/Number of units

= 1,566,550/19,000

= $82.45 per tire

Note: Commission included in variable selling and admin expenses will not be incurred on the special order and hence, not included in the cost

i.e. 5%*103 = $5.15