Decision on Accepting Additional Business Brightstone Tire and Rubber Company ha

Question

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 145,000 tires. Brightstone presently produces and sells 111,000 tires for the North American market at a price of $106 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 17,000 tires for $89.4 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

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 $95,200.

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.

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

Direct materials $40 Direct labor 15 Factory overhead (70% variable) 24 Selling and administrative expenses (40% variable) 21 Total $100

Explanation / Answer

Differential Analysis Reject Accept Differential Orderr Order Effect Revenues 11766000 13285800 1519800 Cost: Direct material 4440000 5120000 -680000 Direct labour 1665000 1920000 -255000 Variable factory OH (24*70%) 1864800 2150400 -285600 Variable Selling and admin OH (21*40%) 932400 985,100 -52700 Shipping cost 0 102,000 -102000 Certification cost 0 95200 -95200 Income/ (Loss) 2863800 2913100 49300 Accept the oder. Minimum Price acceptable to Bridgestone:; 2.841176 Proposed selling price of special order 89.40 Less: Incremental income per unit (49300/17000) 2.9 Minimum Price acceptable to Bridgestone:; 86.50

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