Question

Decision on Accepting Additional Business Glide Ride Tire and Rubber Company has capacity to produce 221,000 tires. Glide Ride presently produces and sells 169,000 tires for the North American market at a price of $110.00 per tire. Glide Ride is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 26,000 tires for $92.10 per tire. Glide Ride's accounting system indicates that the total cost per tire is as follows: Direct materials $42 Direct labor 15 Factory overhead (70% variable) 25 Selling and administrative expenses (40% variable) 22 Total $104 Glide Ride 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 $6.00 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Glide Ride estimates that this certification would cost $150,800. Hide a. Prepare a differential analysis dated May 4, 2014, 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) May 4, 2014 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 Glide Ride? Round your answer to two decimal places. $ per unit

Answer 1

Differencial analysis whether to accept the order from Euro Motors or not
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income
Revenue	$18,590,000	$20,984,600	$2,394,600
Cost:			$0
Direct Material	$7,098,000	$8,190,000	$1,092,000
Direct Labour	$2,535,000	$2,925,000	$390,000
Factory Overhead	$4,225,000	$4,680,000	$455,000
Selling & Administrative expenses	$3,718,000	$3,803,800	$85,800
Shipping Cost	$0	$156,000	$156,000
Certification Cost	$0	$150,800	$150,800
Total cost	$17,576,000	$19,905,600	$2,329,600
Income (Loss)	$1,014,000	$1,079,000	$65,000
The company can accept the special order from Euro Motors, as it is yielding an Income of $65,000. Glide Ride has the capacity to produce 52,000 more tire than what it is producing to sell in North American Market. Thus it is recommended to accept the special Order
Working Note:
	Special Order
Revenue (26000 units x $92.10 each)	$2,394,600
Cost:
Direct Material (26000 units x $42 each unit)	$1,092,000
Direct Labour (26000 units x $15 each unit)	$390,000
Factory Overhead (26000 units x $25 each unit x 70%)	$455,000
Selling & Administrative expenses (26000 units x $3.3 each)	$85,800
Shipping Cost (26000 units x $6 each)	$156,000
Certification Cost	$150,800
Total cost	$2,329,600
Income (Loss)	$65,000
Variable Selling & administrative expenses = 22 x 40% = $8.80
Variable selling and administrative expenses - sales commission = $8.80 - $5.50 = $3.30
Sales Commission = $110 x 5% = $5.50
b. Minimum price per unit that would be financially acceptable to Glide Ride
Direct Material	$42.00
Direct Labour	$15.00
Variable Factory Overhead	$17.50
Selling and administrative expenses	$3.30
Shipping cost	$6.00
Certification cost	$5.80
Total cost per unit	$89.60
Minimum price per unit that would be financially acceptable is $89.60