Question

Brightstone Tire and Rubber Company has capacity to produce 194,000 tires. Brightstone presently produces and sells 134,900 tires for the North American market at a price of $180 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 19,400 tires for $115.60 per tire. Brightstone’s accounting system indicates that the total cost per tire is as follows:

Direct materials	$57
Direct labor	20
Factory overhead (57% variable)	26
Selling and administrative expenses (46% variable)	26
Total	$129.00

Brightstone pays a selling commission equal to 4% 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 $7.01 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $162,184.

Required:

A.

Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.

B.

Determine whether the company should reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors

C.

What is the minimum price per unit that would be financially acceptable to Brightstone?

Labels
Cash flows from investing activities
Costs
Amount Descriptions
Certification costs
Direct labor
Direct materials
Gain on sale of investments
Income (Loss)
Loss on sale of investments
Revenues
Shipping costs
Variable factory overhead
Variable selling and administrative expenses

Answer 1

a)Differential Analysis
Reject Order (Alternative-1) or Accpt Order ( Alternative-2)
Particular	Alternative-1 ( Reject Order)	Alternativ-2 (Accept Order)
Revenue from Special Order (19400 *$115.60)		$2,242,640
Total Revenue		$2,242,640
Less: Variable Cost
Direct Material@$57		$1,105,800
Direct Labour@ $20		$388,000
Variable Factory OH ($26*57%)		$287,508
S&D Exp for Special order		$92,344
(19400*(($26*46%)-($180*4%)))
Shipping Cost ($7.01*19400)		$135,994
Certification Cost		$162,184
Income/(Loss)		$70,810
b) Differntial effect on imcome is $70810, hence the company should accept the proposal
c) Computation of Minimum Selling Price
Particular	Amount
Selling Price	$115.60
Differential Income per tire($70810/19400)	$3.65
Minimum slleing perice can be offer	$111.95