Question

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 264,000 tires. Brightstone presently produces and sells 202,000 tires for the North American market at a price of $103 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 31,000 tires for $84.05 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Direct materials	$39
Direct labor	14
Factory overhead (60% variable)	24
Selling and administrative expenses (30% variable)	21
Total	$98

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 $170,500.

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

Differential Analysis
	Reject order (alternative 1)	accept order(alternative 2)	Differential effect (alternative 2)
Revenue (31000*84.05)	0	2605550	2605550
Costs:
Direct material (31000*39)	0	1209000	1209000
Direct labor (31000*14)	0	434000	434000
variable factory overhead (31000*24*60%)	0	446400	446400
variable selling & adm exp	0
[31000*(21*30%)-(103*5%)]	0	35650	35650
shipping cost (31000*6)	0	186000	186000
certification cost	0	170500	170500
income(loss)	0	124000	124000

company should accept the alternative 2

b) Calculation of minimum price per unit
Direct material	1209000
direct labor	434000
factory overhead	446400
selling & adm overhead	35650
shipping cost	186000
certification cost	170500
total cost (a)	2481550
no of tires (b)	31000
Minimum price (a)/(b)	80.05