Question

Decision on Accepting Additional Business

Miramar Tire and Rubber Company has capacity to produce 289,000 tires. Miramar presently produces and sells 221,000 tires for the North American market at a price of $102.00 per tire. Miramar is evaluating a special order from a South American automobile company, Rio Motors. Rio Motors is offering to buy 34,000 tires for $84.90 per tire. Miramar’s accounting system indicates that the total cost per tire is as follows:

Direct materials	$39
Direct labor	14
Factory overhead (70% variable)	23
Selling and administrative expenses (30% variable)	20
Total	$96

Miramar pays a sales 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 $6.00 per tire. In addition, Rio has made the order conditional on Miramar Tire and Rubber Company receiving a Brazilian safety certification. Rio estimates that this certification would cost Miramar Tire $183,600.

a. Prepare a differential analysis report for the proposed sale to Rio Motors. Round your answers to the nearest cent.

Miramar Tire And Rubber Company
Sell to Rio Motors
Differential Analysis Report
	Per Unit	Total
Differential revenue from accepting special offer	$	$
Differential costs from accepting special offer: (Enter per unit cost amounts as positive values; enter the per unit cost savings as a negative value).
	$
	$	$
Total differential costs		$
		$

b. What is the minimum price per unit that would be financially acceptable to Miramar? Round your answer to the nearest cent.

Answer 1

Differential analysis :

	Per unit	Total
Differential revenue from accepting special offer	84.90	2886600
Differential costs from accepting special offer
Direct material	39	1326000
Direct labour	14	476000
Variable overhead	16.1	547400
Variable selling and administrative expense (20*30%-102*5%)	0.90	30600
Additional shipping cost	6.00	204000
Additional certification cost	5.4	183600
Total differential cost	81.40	2767600
Differential income		119000

b) Minimum price per unit = $81.40