Question

Decision on Accepting Additional Business Talladega Tire and Rubber Company has capacity to produce 230,000 tires. Talladega presently produces and sells 176,000 tires for the North American market at a price of $109 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 27,000 tires for $89.75 per tire. Talladega's accounting system indicates that the total cost per tire is as follows: Direct materials Direct labor Factory overhead (60% variable) Selling and administrative expenses (40% variable) Total $103 Talladega 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 $6 per tire. In addition, Autobahn has made the order conditional on receiving European safety certification. Talladega estimates that this certification would cost $156,600. 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 "O". If required, round interim calculations to two decimal places. Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) July 31 Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2) Revenues $ 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

Answer 1

Solution The Talladega Tire and Rubber Company has capacity to produce 230,000 tires and presently produces and sells 176,000 tires for the North American market. The idle capacity of the Talladega Tire and Rubber Company is 54,000 tires which is sufficient to produce 27,000 tires for the special order without affecting the regular sales. Step-1 : Analysis of total cost per tire between fixed and variable Direct materials Direct labor Factory overhead Selling and administrative expenses Variable cost $41.00 $15.00 $15.00 $8.80 $79.80 Fixed cost $0.00 $0.00 $10.00 $13.20 $23.20 Total cost $41.00 $15.00 $25.00 $22.00 $103.00 Step-2 : Calculation of Variable cost per unit for Special order Direct materials Direct labor Variable Factory overhead Variable Selling and administrative expenses ($8.80 - $109 x 5%) Variable shipping cost Variable cost per unit for special order Special Order $41.00 $15.00 $15.00 $3.35 $6.00 $80.35 Requirement a.: Differential analysis dated July 31 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Autobahn Motors. Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2) July 31 Differential Reject Accept Effect Order Order on Income (Alternative 1) (Alternative 2(Alternative 2) $0 $2,423,250 $2,423,250 $0 Revenues Costs: Direct materials Direct labor Variable factory overhead Variable selling and admin. expenses Shipping costs Certification costs Income (Loss) $1,107,000) ($405,000)| ($405,000) ($90,450)| ($162,000) ($156,600) $97,200 ($1,107,000) ($405,000) ($405,000) ($90,450) ($162,000) ($156,600) $97,200 $0 $0 $0

Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Autobahn Motors. The special order would result into additional income of $97,200, hence it is advisable to accept the special order. Accept the special order Reject the special order Requirement b.: Computation of minimum price per unit that would be financially acceptable to Talladega The Company would accept the special order at a minimum price that would be sufficient to cover the incremental cost of the special order. Incremental cost of the special order Direct materials Direct labor Variable factory overhead Variable selling and admin. Expenses Shipping costs Certification costs Total incremental cost $1,107,000 $405,000 $405,000 $90,450 $162,000 $156,600 $2,326,050 Minimum acceptable price per unit = $2,326,050 / 27,000 units = $86.15 Minimum price per unit | $86.15