Brightstone Tire and Rubber Company has capacity to produce 194,000 tires. Brigh
ID: 2509158 • Letter: B
Question
Brightstone Tire and Rubber Company has capacity to produce 194,000 tires. Brightstone presently produces and sells 134,900 tires for the North American market at a price of $180 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 19,400 tires for $115.60 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 $7.01 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $162,184.
What is the minimum price per unit that would be financially acceptable to Brightstone?
Direct materials $57 Direct labor 20 Factory overhead (57% variable) 26 Selling and administrative expenses (46% variable) 26 Total $129.00Explanation / Answer
a)Differential Analysis Reject Order (Alternative-1) or Accpt Order ( Alternative-2) Particular Alternative-1 ( Reject Order) Alternativ-2 (Accept Order) Revenue from Special Order (19400 *$115.60) $2,242,640 Total Revenue $2,242,640 Less: Variable Cost Direct Material@$57 $1,105,800 Direct Labour@ $20 $388,000 Variable Factory OH ($26*57%) $287,508 S&D Exp for Special order $92,344 (19400*(($26*46%)-($180*4%))) Shipping Cost ($7.01*19400) $135,994 Certification Cost $162,184 Income/(Loss) $70,810 b) Differntial effect on imcome is $70810, hence the company should accept the proposal c) Computation of Minimum Selling Price Particular Amount Selling Price $115.60 Differential Income per tire($70810/19400) $3.65 Minimum slleing perice can be offer $111.95
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