EX 25-15 Decision on accepting additional business Brightstone Tire and Rubber C

Question

EX 25-15 Decision on accepting additional business Brightstone Tire and Rubber Company has capacity to produce 170,000 tires. Brightstone presently produces and sells 130,000 tires for the North American market at a price of $175 per tire. Brightstone is evaluating a special order from a European automobile com- pany, Euro Motors. Euro is offering to buy 20,000 tires for $116 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows: OBJ. 1 $ 56 Direct materials Direct labor Factory overhead (60% variable) Selling and administrative expenses (45% variable) Total 25 26 $129 Brightstone pays a selling commission equal to 5% of the selling price on North Ameri- can 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 $7.50 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $165,000. a. Prepare a differential analysis dated January 21 on 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?

Explanation / Answer

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Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt.2) January 21 Reject Order Accept Order Differential Effect on Income (Alternative 1) (Alternative 2) (Alternative 2) Revenues                         22,750,000                                       25,070,000            2,320,000 (130000*175) (130000*175)+(20000*116) Costs Direct Materials                           7,280,000                                          8,400,000            1,120,000 (130000*56) (150000*56) Direct Labor                           2,860,000                                          3,300,000               440,000 (130000*22) (150000*22) Variable Factory Overhead                           1,950,000                                          2,250,000               300,000 (60% of 25) (130000*60%*25) (150000*60%*25) Variable Selling and Admin Expenses 1521000 1580000                  59,000 (45% of 26) (130000*45%*26) (130000*45%*26)+(20000*2.95 Shipping cost                                           -                                               150,000               150,000 (20000*7.5) Certification cost                                           -                                               165,000               165,000 Income (Loss)                           9,139,000                                          9,225,000                  86,000 Bright stone should accept the special order from Euro Motors

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