Question

Talladega Tire and Rubber Company has capacity to produce 289,000 tires. Talladega presently produces and sells 221,000 tires for the North American market at a price of $99 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 34,000 tires for $81.75 per tire. Talladega’s accounting system indicates that the total cost per tire is as follows:

Direct materials	$38
Direct labor	14
Factory overhead (70% variable)	23
Selling and administrative expenses (30% variable)	20
Total	$95

Talladega 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 $5 per tire. In addition, Autobahn has made the order conditional on receiving European safety certification. Talladega estimates that this certification would cost $176,800.

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 "0". If required, round interim calculations to two decimal places.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
July 31
	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)	$	$	$

Feedback

Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Autobahn Motors.
Accept the special order

b. What is the minimum price per unit that would be financially acceptable to Talladega? Round your answer to two decimal places.
$per unit

Answer 1

Differential Analysis:
			Reject	Accept	Differential Effect
Revenue			21879000	24658500	2779500
Cost:
Direct Material			8398000	9,690,000	-1292000
Direct Labour			3094000	3,570,000	-476000
Variable Factory OH			3558100	4,105,500	-547400
Variable Selling OH			1326000	1,361,700	-35700	(6 - 99*5%)
Shipping cost			0	170000	-170000
Certification cost			0	176800	-176800
Income /(loss)			5502900	5584500	81600
Minimum Selling price:
Price of order			81.75
Less: Per unit margin			2.4
(81600/34000)
Minimum Selling price acceptable			79.35