Question

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Decision on Accepting Additional Business

Talladega Tire and Rubber Company has capacity to produce 196,000 tires. Talladega presently produces and sells 150,000 tires for the North American market at a price of $91 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 23,000 tires for $78.35 per tire. Talladega’s accounting system indicates that the total cost per tire is as follows:

Direct materials	$35
Direct labor	13
Factory overhead (70% variable)	21
Selling and administrative expenses (40% variable)	18
Total	$87

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 $110,400.

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)	$	$	$

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

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

Ans:

Differetial analysis
Reject order (alt1) or accept order (alt2)
	Reject order (alt 1)	Accept order (alt 2)	Differential effects (alt 2)
Revenues	0	1802050	1802050
Costs:
Direct materials	0	805000	-805000
Direct labor	0	299000	-299000
Variable factory overhead	0	338100	-338100
Variable selling & admin exp	0	60950	-60950
Shipping costs	0	115000	-115000
Certification costs	0	110,400	-110400
Profit (loss)	0	73,600	73,600
Variable Selling And Admin Exp=23000-((18*40%)-(91*5%))=60950
Accept: special order should be accepted income would increase by   $73600
B) Minimum price =78.35-(73600/23000)=75.15

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