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 119,000 tires. Brightstone presently produces and sells 91,000 tires for the North American market at a price of $104 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 14,000 tires for $85.1 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 $77,000.

a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. 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 (60% variable) 24 Selling and administrative expenses (30% variable) 21 Total $100

Explanation / Answer

a).

**variable factory overhead = 24*.60=14.4*14000=201600

**variablel selling : [21*.30]= 6.3- (85.1*.05]

                     6.3 -4.255= 2.045

since the differential income is positive ,offer should be accepted.

b)Minimum price Equal to total cost divided by units

    =[1161230/14000]

    = $ 82.95 per unit

**total cost = 560000+210000+201600+28630+84000+77000=1161230

Reject order Accept order Differential
Effect
on Income Revenue 0 `14000*85.1=1191400 1191400 cost Direct material 0 14000*40=560000 (560000) Direct labor 0 14000*15=210000 (210000) Variable factory overhead 0 14000*14.4= 201600 (201600) Variable selling and admin. expenses 0 14000*2.045= 28630 (28630) Shipping costs 0 14000*6=84000 (84000) Certification costs 0 (77000) Income (Loss) 30170

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