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). |
||
| 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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Solution a:
| Miramar Tire And Rubber Company | ||
| Sell to Rio Motors | ||
| Differential Analysis Report | ||
| Particulars | Per Unit | Total |
| Differential revenue from accepting special offer | $84.90 | $2,886,600.00 |
| Differential costs from accepting special offer: | ||
| Direct materials | $39.00 | $1,326,000.00 |
| Direct labor | $14.00 | $476,000.00 |
| Variable factory overhead | $16.10 | $547,400.00 |
| Variable selling and administrative | $6.00 | $204,000.00 |
| Less avoided sales commission | -$5.10 | -$173,400.00 |
| Additional shipping costs | $6.00 | $204,000.00 |
| Variable special offer product cost | $76.00 | $2,584,000.00 |
| Incremental certification costs | $183,600.00 | |
| Total differential costs | $2,767,600.00 | |
| Differential income from accepting special order | $119,000.00 | |
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