Question

Decision on Accepting Additional Business

Miramar Tire and Rubber Company has capacity to produce 238,000 tires. Miramar presently produces and sells 182,000 tires for the North American market at a price of $101.00 per tire. Miramar is evaluating a special order from a South American automobile company, Rio Motors. Rio Motors is offering to buy 28,000 tires for $82.45 per tire. Miramar’s accounting system indicates that the total cost per tire is as follows:

Direct materials	$38
Direct labor	14
Factory overhead (70% variable)	23
Selling and administrative expenses (30% variable)	20
Total	$95

Miramar pays a sales 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 $6.00 per tire. In addition, Rio has made the order conditional on Miramar Tire and Rubber Company receiving a Brazilian safety certification. Rio estimates that this certification would cost Miramar Tire $151,200.

a. Prepare a differential analysis report for the proposed sale to Rio Motors. Round your answers to the nearest cent.

Miramar Tire And Rubber Company
Sell to Rio Motors
Differential Analysis Report
	Per Unit	Total
Differential revenue from accepting special offer	$	$
Differential costs from accepting special offer: (Enter per unit cost amounts as positive values; enter the per unit cost savings as a negative value).
Direct materials	$
Direct labor
Variable factory overhead
Variable selling and administrative
Less avoided sales commission
Additional shipping costs
Variable special offer product cost	$	$
Incremental certification costs
Total differential costs		$
Differential income from accepting special order		$

b. What is the minimum price per unit that would be financially acceptable to Miramar? Round your answer to the nearest cent.
$

Answer 1

Based on the information available in the question, we can answer as follows:-

Differential Analysis Report
Particulars	Per Unit	Total
Differential revenue from accepting Special offer	82.45	2,308,600
Differential costs from accepting Special offer:-
Direct Materials	38.00	1,064,000
Direct Labor	14.00	392,000
Variable factory overhead($23 per unit * 70% variable)	16.10	450,800
Variable selling and administrative expenses ($20 per unit * 30% variable)	6.00	168,000
Less:- Avoided sales commission($101*5%)	(5.05)	(141,400)
Additional Shipping costs	6.00	168,000
Incremental Certification costs		151,200
Total Differentiation costs		2,252,600
Differential income from accepting special order		56,000

Requirement B:-

Minimum price that would be acceptable for Miramar

=Relevant cost of accepting special order/No.of tires

=$2,252,600/28,000 tires

=$80.45

Minimum price that would be acceptable for Miramar = $80.45

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