Decision on Accepting Additional Business Talladega Tire and Rubber Company has

Question

Decision on Accepting Additional Business Talladega Tire and Rubber Company has capacity to produce 221,000 tires. Talladega presently produces and sells 169,000 tires for the North American market at a price of $111 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 26,000 tires for $93.65 per tire. Talladega'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 (40% variable) Total $42 26 $106 Talladega pays a selling commission equal to 5% oof 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 $6 per tire. In addition, Autobahn has made the order conditional on receiving European safety certification. Talladega estimates that this certification would cost $153,400 a. Prepare a differential analysis dated July 31 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Autobahn Motors. If an amount is zero, enter zero "O". If required, round interim calculations to two decimal places. Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) July 31 Order (Alternative 1) Order (Alternative 2) Differential Effect on Income (Alternative 2) Costs Direct materials Direct labor Variable factory overhead Variable selling and admin. expenses Shipping costs Certification costs Income (Loss) Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Autobahn Motors. b. What is the minimum price per unit that would be financially acceptable to Talladega? Round your answer to two decimal places. per unit

Explanation / Answer

Since the additional order reduces the existing profits by 73,580.00 $ it is beneficial to reject offer from Autobahn Motors

Working Note:-

Alternative 1 Alternative 2 Reject Order Accept Order Differential Effect on income(Alt 1+Alt2 ) No of tyres          169,000.00          195,000.00 Revenues    18,759,000.00    21,193,900.00                       2,434,900.00 Costs Direct Materials      7,098,000.00      8,190,000.00                       1,092,000.00 Direct Labour      2,704,000.00      3,120,000.00                           416,000.00 Variable Factory OH      3,075,800.00      3,549,000.00                           473,200.00 Variable Selling and Admin Expenses      1,487,200.00      1,705,080.00                           217,880.00 Shipping Costs 0.00          156,000.00                           156,000.00 Cerification cost 0.00          153,400.00                           153,400.00 Total Costs    14,365,000.00    16,873,480.00                       2,508,480.00 Income/(Loss)      4,394,000.00      4,320,420.00                           (73,580.00) a

Since the additional order reduces the existing profits by 73,580.00 $ it is beneficial to reject offer from Autobahn Motors

Working Note:-

For Alt 2 No of units produced= 169000+26000=195000 For 26000 additional units selling and admin oh excluding sales commission= 8.38 Selling and admin OH incl commission(40% variable) 8.80 Selling and admin oh excluding commission 8.38 b Relevant Costs per unit Direct Material 42 Direct Labour 16 Shipping Costs 6 Certification costs 5.9 Variable Factory OH 18.2 Variable Selling and Admin OH 8.38 96.48 Minimum Price per unit that would be financially viable to Talladega

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