Question

Decision on Accepting Additional Business Brightstone Tire and Rubber Company has capacity to produce 247,000 tires. Brightstone presently produces and sells 189,000 tires for the North American market at a price of $100 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 29,000 tires for $84.4 per tire. Brightstone'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 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 $153,700. 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

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Part a
			Reject	Accept	Incremental
No of Units to be Sold			189,000	218,000	29,000
Revenue	189000*100	(189000*100)+(29000*84.4)	$     18,900,000	$      21,347,600	$    2,447,600
Less: Cost
Direct Material		No of Units*38	$        7,182,000	$        8,284,000	$    1,102,000
Direct Labor		No of Units*14	$        2,646,000	$        3,052,000	$       406,000
Factory Variable Overhead		No of Units*23*70%	$        3,042,900	$        3,509,800	$       466,900
Factory Fixed Overhead		189000*23*30%	$        1,304,100	$        1,304,100	$                 -
Sales Commission		189000*5	$           945,000	$           945,000	$                 -
Other Variable Selling Expense	(20*30%)-5	No of Units*1	$           189,000	$           218,000	$         29,000
Fixed Selling Expense		189000*20*70%	$        2,646,000	$        2,646,000	$                 -
Shipping Cost		6*29000		$           174,000	$       174,000
Certification Cost				$           153,700	$       153,700
Net Income			$           945,000	$        1,061,000	$       116,000
Should Accept
Part b
Minimum Price:
Direct Material		$                                     38.00
Direct Labor		$                                     14.00
Factory Variable Overhead	23*70%	$                                     16.10
Other Variable Selling Expense		$                                        1.00
Shipping Cost		$                                        6.00
Certification Cost	153700/29000	$                                        5.30
Minimum Selling Price		$                                     80.40