Question

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 162,000 tires. Brightstone presently produces and sells 124,000 tires for the North American market at a price of $110 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 19,000 tires for $89.4 per tire. Brightstone'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 (30% variable)	22
Total	$104

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 $110,200.

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.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
January 21
	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 Brightstone? Round your answer to two decimal places.
$per unit

Answer 1

Particulars				Reject order	Accep order	Differential eff on income
Revenue (19000*89.4)				0	1698600	1698600
Costs : Direct material (19000*42)				0	-798000	-798000
Direct labor (19000*15)				0	-285000	-285000
Variable factory OH (19000)*25*70%				0	-332500	-332500
selling & adm exp - variable 19000*(22*30%)-(110*5%)				0	-20900	-20900
shipping cost (19000*6)				0	-114000	-114000
Certificate cost				0	-110200	-110200
income					38000	38000
b) Net income increases $38000 therefore accept the offer
c) minimum price per unit = 1660600/19000 = 87.4 per unit
differntial cost sum will be = 1660600