Talladega Tire and Rubber Company has capacity to produce 162,000 tires. Tallade
ID: 2606606 • Letter: T
Question
Talladega Tire and Rubber Company has capacity to produce 162,000 tires. Talladega presently produces and sells 124,000 tires for the North American market at a price of $115 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 19,000 tires for $97.85 per tire. Talladega’s accounting system indicates that the total cost per tire is as follows:
Talladega pays a selling commission equal to 5% oof 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, Autobahn has made the order conditional on receiving European safety certification. Talladega estimates that this certification would cost $115,900.
a. Prepare a differential analysis dated July 31 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Autobahn 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 Autobahn Motors.
What is the minimum price per unit that would be financially acceptable to Talladega? Round your answer to two decimal places.
Direct materials $44 Direct labor 16 Factory overhead (70% variable) 26 Selling and administrative expenses (40% variable) 23 Total $109Explanation / Answer
The special order can be accepted as the special order is giving an extra income of $61,608.
The minimum price that would be acceptable for this order will be $94.61 --- $97.85 - ($61608/19000)
Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) Jul-31 Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2) Revenues (i) 14260000 16119150 1859150 Costs: Direct materials (ii) 5456000 6292000 -836000 Direct labor (iii) 1984000 2288000 -304000 Variable factory overhead (iv) 2256800 2602600 -345800 Variable selling and admin. Expenses (v) 1140800 1222643 -81843 Shipping costs 114000 -114000 Certification costs 115900 -115900 Income (Loss) 3422400 3484008 61608 Workings: Alternative 1 Alternative 2 Unit sales for the alternatives 124000 143000 Revenues @$115 per tire for 124,000 tires 14260000 14260000 Revenues @$97.85 per tire for 19,000 tires 1859150 Total Revenues (i) 14260000 16119150 Direct material @$44 per unit (ii) 5456000 6292000 Direct labor @$16 per unit (iii) 1984000 2288000 Variable protion of factory overhead is 70% of $26.00 i.e., $$18.20 per unit. Variable factory overhead (iv) 2256800 2602600 Variable portion of selling overhead is 40% of $23.00 i.e., $9.20 per unit. Variable selling and admin. Expenses ( v) 1140800 1222643 Variable selling and admin. Expenses for the overseas order = 143,000 x $9.20 - 19,000 x 97.85 x 5%
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