Decision on Accepting Additional Business Miramar Tire and Rubber Company has ca

Question

Decision on Accepting Additional Business Miramar Tire and Rubber Company has capacity to produce 119,000 tires. Miramar presently produces and sells 91,000 tires for the North American market at a price of $104.00 per tire. Miramar is evaluating a special order from a South American automobile company, Rio Motors. Rio Motors is offering to buy 14,000 tires for $86.60 per tire Miramar's accounting system indicates that the total cost per tire is as follows: Direct materials Direct labor Factory overhead (70% variable) Selling and administrative expenses (30% variable) Total $40 15 24 21 $100 Miramar pays a sales commission equal to 5% of the selling price on North American orders which is included in the variable portion of these in an 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 $6.00 per tire. In addition, Rio has made the order conditional on Miramar Tire and Rubber Company receiving a Brazilian safety certification. Rio estimates that this certification would cost Miramar Tire $77,000

Explanation / Answer

per unit total differencial revenue from accepting special offer 86.60 1212400 (86.60*14000) differencial cost from accepting special offer: Direct material 40 Direct labour 15 Variable factory overhead(24*70%) 16.8 Variable selling and administrative 6.3 less: avoided sales commission (86.6*5%) (4.33) Additional shipping cost 6 Variable special offer product cost $79.77 $1116780 Incremental certification cost 77000 Total differencial cost $ 1193780 Differencial income from accepting special order (revenue - total cost) (1212400 - 1193780) $ 18620

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