Question

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 230,000 tires. Brightstone presently produces and sells 176,000 tires for the North American market at a price of $108 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 27,000 tires for $92.2 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Direct materials	$41
Direct labor	15
Factory overhead (70% variable)	25
Selling and administrative expenses (40% variable)	22
Total	$103

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 $153,900.

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

Part-A : Differential Analysis - BrightStone Tire
	Alternative 1	Alternative 2	Alternative 2
	Reject Order	Accept Order	Differential Effect on Income
Sales Revenue		$2,489,400	$2,489,400
Less:		(92.20*27000)
Direct Material		-$1,107,000	-$1,107,000
		(41*27000)
Direct Labour		-$405,000	-$405,000
		(15*27000)
Factory Overhead		-$472,500	-$472,500
		(25*70%*27000)
Selling and Administrative Overhead		-$91,800	-$91,800
		((22*40%)-(108*5%))*27000
Shipping Cost		-$162,000	-$162,000
		(6*27000)
Certification Cost		-$153,900	-$153,900
Net Benefit		$97,200	$97,200

Part-b: Computation of Minimum price per Unit
Direct Material	$1,107,000
Direct Labour	$405,000
Factory Overhead	$472,500
Selling and Administrative Overhead	$91,800
Shipping Cost	$162,000
Certification Cost	$153,900
Total Cost	$2,392,200
No. of unit	27,000
Price per Unit	88.6