Question

Ch 25 HW LO 1 BE Decision on Accepting Additional Business Brightstone Tire and Rubber Company has capacity to produce 289,000 tires. Brightstone presently produces and sells 221,000 tires for the North American market at a price of $106 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 34,000 tires for $88.8 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows: Direct materials $40 Direct labor Factory overhead (70% variable) Selling and administrative expenses (40% variable) 21 Total $100 Brightstone pays a selling commission equal to 5% of the selling price on North American orders, which is included in the variable portion of the seling 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, Euro has made the order conditional on receiving European safety certification Brightstone estimates that this certification would cost $190,400. a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors. If an amount is zero, enter zero "0". If required, round interim calculations to two decimal places Differential Analysis Reject Order (Alt. 1) or Accept Order (Alt. 2)

Answer 1

Differential Analysis Rreject Order (Alt.1) or Accept Order (Alt.2) January 21 Reject Accept Effect on (Alt. 1) (Alt. 2) Income (Alt. 2) Revenues $0 $3,019,200 $3,019,200 [34000 tires x $88.8] Costs: Direct materials $0 $1,360,000 $1,360,000 (34000 tires x $40] Direct labor $510,000 $510,000 (34000 tires x $15] Variable factory overhead $571,200 $571,200 [34000 tires x $24 x 70%] Variable sell. & admin. exps. $0 $105,400 $ 105,400 [Ref: Workings] Shipping costs $204,000 $204,000 (34000 tires x $6] Certification costs $190,400 $190,400 [Spcial fixed costs] Income (Loss) $0 $78,200 $78,200 $0 NOTE: Variable costs will not be incurred if special order is rejected and so they are zero for analysis. Fixed costs are those costs which would remain the same in total irrespective of accepting special order or not. It is a committed cost to be incurred by the firm whether it accepts special order or not. Therefore, they shall not be considered as relevant costs for evaluating profit on special order. Still, if any specific or special fixed costs to be incurred for special order, such fixed costs only shall be considered.

Workings: Tires produced & sold to North American market Variable sell. & admin. exps. per tire Total variable sell. & admin. exps. currently incurred Less: Sales commission included in this variable cost Variable sell. & admin. exps. without sales commission 221,000 $8.4 ($21 x 40%] $1,856,400 [221000 x $8.4] $1,171,300 [221000 x $106 x 5%] $685,100 Therefore, Unit variable sell. & admin. exps. without sales comm. Number of tires ordered by Euro Motors Variable sell. & admin. exps. relevant for special order $3.1 ($685100 / 221000] 34,000 $105,400 ($3.1 x 34000]