Glide Ride Tire and Rubber Company has capacity to produce 170,000 tires. Glide
ID: 2505215 • Letter: G
Question
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 $90 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 $72 per tire. Glide Ride's accounting system indicates that the total cost per tire is as follows:
Direct Materials.............................................................$ 34
Direct Labor.................................................................. 12
Factory Overhead (60% Variable)................................ 20
Selling and Administrative Expenses (35% Variable)... 18
Total............................................................................. $ 84
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 $95,000.
a. Prepare a differential analysis dated May 4, 2012, on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors.
getting a little hung up, especially on the selling and administrative expenses
Explanation / Answer
Removing 5% commission on selling price of $90 = $4.5 from variable cost in selling and admin expenses
At $72per unit, the contribution margin is Selling price - Variable costs = 72-64.80 = $7.2 which is positive and can help recover some of the fixed costs. Thus, the project should be accepted.
Total Fixed Variable Direct Materials $34 $0 $34 Direct Labor 12 $0 12 Factory Overhead (60% Variable) 20 $8 12 Selling and Administrative Expenses (35% Variable) 18 $11.70 6.3 Total $84 $20 $64Related Questions
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