Decision on accepting additional business Goodman Tire and Rubber Company has ca

Question

Decision on accepting additional business Goodman Tire and Rubber Company has capacity to produce 170,000 tires. Goodman presently produces and sells 130,000 tires for the North American market at a price of dollar125 per tire. Goodman is evaluating a special order from a European automobile company, Euro Motors. Euro Motors is offering to buy 20,000 tires for dollar92 per tire. Goodman's accounting system indicates that the total cost per tire is as follows: Goodman 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 dollar6.50 per tire. In addition, Euro Motors has made the order conditional on receiving European safety certification. Goodman estimates that this certification would cost dollar142,000. Prepare a differential analysis dated January 21, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. What is the minimum price per unit that would be financially acceptable to Goodman'

Explanation / Answer

a. Special order should not be accepted

b.

Minimum price should be $133 per unit to generate a profit of $48.

Differential Analysis Reject (Alternative 1) or Accept (Alternative 2) Reject Order Accept Order (Alternative 1) (Alternative 2) Revenue 125 92 Costs: Direct Material 38 38 Direct Labour 16 16 Variable factory overhead 14.4 14.4 Variable selling and administrative overhead 9 2.75 Shipping Costs 0 6.5 Certification Cost 0 7.1 Net profit/(loss) 48 7

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