Question

Decision on Accepting Additional Business

Talladega Tire and Rubber Company has capacity to produce 500,000 tires. Talladega presently produces and sells 400,000 tires for the North American market at a price of $200 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 100,000 tires for $150 per tire. Talladega's accounting system indicates that the total cost per tire is as follows:

Direct materials	$75
Direct labor	20
Factory overhead (70% variable)	30
Selling and administrative expenses (60% variable)	18
Total	$143

Talladega pays a selling commission equal to 3% 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 $3 per tire. In addition, Autobahn has made the order conditional on receiving European safety certification. Talladega estimates that this certification would cost $400,000.

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 Effects (Alternative 2)
Revenues	$fill in the blank d25c6efbd039f94_1	$fill in the blank d25c6efbd039f94_2	$fill in the blank d25c6efbd039f94_3
Costs:
Direct materials	fill in the blank d25c6efbd039f94_4	fill in the blank d25c6efbd039f94_5	fill in the blank d25c6efbd039f94_6
Direct labor	fill in the blank d25c6efbd039f94_7	fill in the blank d25c6efbd039f94_8	fill in the blank d25c6efbd039f94_9
Variable factory overhead	fill in the blank d25c6efbd039f94_10	fill in the blank d25c6efbd039f94_11	fill in the blank d25c6efbd039f94_12
Variable selling and admin. expenses	fill in the blank d25c6efbd039f94_13	fill in the blank d25c6efbd039f94_14	fill in the blank d25c6efbd039f94_15
Shipping costs	fill in the blank d25c6efbd039f94_16	fill in the blank d25c6efbd039f94_17	fill in the blank d25c6efbd039f94_18
Certification costs	fill in the blank d25c6efbd039f94_19	fill in the blank d25c6efbd039f94_20	fill in the blank d25c6efbd039f94_21
Profit (Loss)	$fill in the blank d25c6efbd039f94_22	$fill in the blank d25c6efbd039f94_23	$fill in the blank d25c6efbd039f94_24

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b. What is the minimum price per unit that would be financially acceptable to Talladega? Round your answer to two decimal places.
$fill in the blank 4dcf1502b024067_2 per unit

Answer 1

Answer :

A.        

Differential Analysis Reject (Alt. 1) or Accept (Alt. 2) Order July 31
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$0	$15,000,0001	$15,000,000
Costs:
Direct materials	0	-7,500,0002	-7,500,000
Direct labor	0	-2,000,0003	-2,000,000
Variable factory overhead	0	-2,100,0004	-2,100,000
Variable selling and admin.
expenses	0	-480,0005	-480,000
Shipping costs	0	-300,0006	-300,000
Certification costs	0	-400,000	-400,000
Income (loss)	$0	$ 2,220,000	$ 2,220,000

1 100,000 tires × $150 per tire

2 100,000 tires × $75 per tire

3 100,000 tires × $20 per tire

4 100,000 tires × ($30 per tire × 70%)

5 100,000 tires × [($18 per tire × 60%) – ($200 × 3%)*]

6 100,000 tires × $3 per tire

* 3% × $200. The avoided sales commission should not be computed on the basis of the $150 price to Autobahn Motors, but on the existing domestic sales price of $200.

Talladega should accept the special order from Autobahn Motors.

B.        $150 - $2220000 / 100000 = $150.00 - $22.20 = $127.80

This is the price at which the differential income would be zero.