Decision on Accepting Additional Business
Miramar Tire and Rubber Company has capacity to produce 187,000 tires. Miramar presently produces and sells 143,000 tires for the North American market at a price of $108.00 per tire. Miramar is evaluating a special order from a South American automobile company, Rio Motors. Rio Motors is offering to buy 22,000 tires for $90.00 per tire. Miramar’s accounting system indicates that the total cost per tire is as follows:
| Direct materials | $41 |
| Direct labor | 15 |
| Factory overhead (70% variable) | 25 |
| Selling and administrative expenses (30% variable) | 22 |
| Total | $103 |
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 $125,400.
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). |
||
| Direct materials | $ | |
| Direct labor | ||
| Variable factory overhead | ||
| Variable selling and administrative | ||
| Less avoided sales commission | ||
| Additional shipping costs | ||
| Variable special offer product cost | $ | $ |
| Incremental certification costs | ||
| Total differential costs | $ | |
| Differential income from accepting special order | $ | |
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a. Subtract the additional costs from the additional revenue. The variable selling and administrative expenses are 30% of $22, less 5% of $108 for the avoided sales commission per order. Also, be sure to add in the additional shipping.
b. What is the minimum price per unit that
would be financially acceptable to Miramar? Round your answer to
the nearest cent.
$
| Mirmar Tire & Rubber Company | ||
| Sell to RIO Motor | ||
| Particular | Per unit | Total |
| Differencial revenue from accepting special offer of 22000 Tires | $90.00 | $1,980,000.00 |
| Differencial cost from accepting special offer: | ||
| Direct material | $41.00 | |
| Direct labour | $15.00 | |
| Variable factory overhead(25*70%) | $17.50 | |
| Variable selling and administrative | $6.60 | |
| less: avoided sales commission (90*5%) | -$4.50 | |
| Additional shipping cost | $6.00 | |
| Variable special offer product cost | $81.60 | $1,795,200.00 |
| Incremental certification cost | $125,400.00 | |
| Total differencial cost | $1,920,600.00 | |
| Differencial income from accepting special order (revenue - total cost) (19,80,000 - 19.20,600) | $59,400.00 | |
| b) Minimum acceptable Price per Unit ($1920600/22000) | $87.30 |
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