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 the special order from Euro Motors (Alternative 2). 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".

Differential Analysis

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

Explanation / Answer

Differential analysis

Differential Effect on income

Reject Order Accept order

Differential Effect on income

(Alternative 1) ( Alternative 2) ( Alternative 2) Revenues 0 1806866 1806866 119.66 Costs: Direct materials 0 -860700 -860700 57 Direct labor 0 -347300 -347300 23 Variable factory overhead 0 -236466 -236466 15.66 Variable selling and administrative expenses 0 -143450 -143450 9.5 Shipping costs 0 -116723 -116723 7.73 Certification costs 0 -127293 -127293 Income (Loss) 0 25066 25066

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