Decision on Accepting Additional Business Glide Ride Tire and Rubber Company has
ID: 2460536 • Letter: D
Question
Decision on Accepting Additional Business Glide Ride Tire and Rubber Company has capacity to produce 170,000 tires. Glide Ride presently produces and sells 130,000 tires for the North American market at a price of $95.00 per tire. Glide Ride is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 20,000 tires for $78.65 per tire. Glide Ride's accounting system indicates that the total cost per tire is as follows: Direct materials $36 Direct labor 13 Factory overhead (70% variable) 22 Selling and administrative expenses (30% variable) 19 Total $90 Glide Ride 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 $5.00 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Glide Ride estimates that this certification would cost $100,000. Hide Hint(s) a. Prepare a differential analysis dated May 4, 2014, 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) May 4, 2014 Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ 0 $ 1881600 $ 1881600 Costs: Direct materials 0 864000 0 Direct labor 0 0 0 Variable factory overhead 0 0 0 Variable selling and admin. expenses 0 0 0 Shipping costs 0 0 0 Certification costs 0 0 0 Income (Loss) $ 0 $ 0 $ 0 Hide Feedback Partially Correct Check My Work Feedback a. Follow Example Exercise 25-6. Subtract the additional costs (each unit cost multiplied by 20,000 tires) from the additional revenue ($78.65 multiplied by the number of tires in the offer). The variable selling and administrative expenses are 30% of $19, less 5% of $95.00 sales commission per unit. Learning Objective 1. 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 Glide Ride? Round your answer to two decimal places. $ per unit
Explanation / Answer
Differential Analysis
Reject
Accept
Differential effect on income
Revenues (20,000*78.65)
0
$1,573,000
$1,573,000
Costs:
Direct Materials (20,000*36)
0
- 720,000
-720,000
Direct labor
(20,000*13)
0
-260,000
-260,000
Variable factory overhead(20,000*15.4)
0
-308,000
-308,000
Selling (5.7-4.75)
0
-19,000
-19,000
Shipping cost
0
-100,000
-100,000
Additional Certification cost
0
-100,000
-100,000
Income(loss)
0
66,000
66,000
Minimum price
Direct materials
$36
Direct labor
13
Variable overhead
15.40
Selling expense
0.95
Shipping cost
5.00
Certification cost (100,000/20,000)
5.00
Minimum price
$75.35
Reject
Accept
Differential effect on income
Revenues (20,000*78.65)
0
$1,573,000
$1,573,000
Costs:
Direct Materials (20,000*36)
0
- 720,000
-720,000
Direct labor
(20,000*13)
0
-260,000
-260,000
Variable factory overhead(20,000*15.4)
0
-308,000
-308,000
Selling (5.7-4.75)
0
-19,000
-19,000
Shipping cost
0
-100,000
-100,000
Additional Certification cost
0
-100,000
-100,000
Income(loss)
0
66,000
66,000
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