Brightstone Tire and Rubber Company has capacity to produce 187,000 tires. Brigh

Question

Brightstone Tire and Rubber Company has capacity to produce 187,000 tires. Brightstone presently produces and sells 134,200 tires for the North American market at a price of $176 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 15,100 tires for $119.66 per tire. Brightstone’s accounting system indicates that the total cost per tire is as follows:

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 $7.73 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $127,293.

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".

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

Direct materials $57 Direct labor 23 Factory overhead (58% variable) 27 Selling and administrative expenses (43% variable) 25 Total $132.00

Explanation / Answer

A.Variable factory overhead per tire = 27*58% = $15.66

Variable selling and administrative expenses per tire = $25*43% = $10.75

Selling commission = 4% of $176 = $7.04

B.

The company should accept the special order from EURO motors since it result in increase in income by $62363

C.

Minimum price per unit that would be financially acceptable to bridge stone = Total cost for special order/ No of units = $1744503/15100 tires = $115.53

Reject order Accept order Differential effect on income (Alternative 1) (Alternative 2) (Alternative 2) Revenues 23619200 (134200*176) 25426066 (23619200+(15100*119.66)) 1806866 Costs- Direct material -7649400 (134200*57) -8510100 (149300*57) -860700 Direct labor -3086600 (134200*23) -3433900 (149300*23) -347300 Variable factory overhead -2101572 (134200*15.66) -2338038 (149300*15.66) -236466 Variable selling and administrative expenses -1442650 (134200*10.75) -1498671 (1442650+(15100*3.71)) -56021 Shipping costs 0 -116723 -116723 Certification costs 0 -127293 -127293 Income / (loss) 9338978 9401341 62363

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