Question

Decision on Accepting Additional Business

Brightstone Tire and Rubber Company has capacity to produce 145,000 tires. Brightstone presently produces and sells 111,000 tires for the North American market at a price of $106 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 17,000 tires for $89.4 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Direct materials	$40
Direct labor	15
Factory overhead (70% variable)	24
Selling and administrative expenses (40% variable)	21
Total	$100

Brightstone 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 $6 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $95,200.

a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. If an amount is zero, enter zero "0". If required, round interim calculations to two decimal places.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
January 21
	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 Euro Motors.

b. What is the minimum price per unit that would be financially acceptable to Brightstone? Round your answer to two decimal places.
$per unit

Answer 1

Differential Analysis
				Reject	Accept	Differential
				Orderr	Order	Effect
Revenues				11766000	13285800	1519800
Cost:
Direct material				4440000	5120000	-680000
Direct labour				1665000	1920000	-255000
Variable factory OH		(24*70%)		1864800	2150400	-285600
Variable Selling and admin OH			(21*40%)	932400	985,100	-52700
Shipping cost				0	102,000	-102000
Certification cost				0	95200	-95200
Income/ (Loss)				2863800	2913100	49300
Accept the oder.
Minimum Price acceptable to Bridgestone:;	2.841176
Proposed selling price of special order					89.40
Less: Incremental income per unit (49300/17000)					2.9
Minimum Price acceptable to Bridgestone:;					86.50