Question

Decision on Accepting Additional Business Brightstone Tire and Rubber Company has capacity to produce 247,000 tires. Brightstone presently produces and sells 189,000 tires for the North American market at a price of $94 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 29,000 tires for $79.4 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows: Direct materials $36 Direct labor Factory overhead (70% variable) Selling and administrative expenses (40% variable) Total $90 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 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 $5 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $145,000. 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) January 21 Reject Accept Differential Order Order Effect (Alternative 1) (Alternative 2) on Income (Alternative 2) Revenues Costs:

Answer 1

a.
Particular	Alternative 1	Alternative 2	Differential Effect
Revenue	2,726,000	2,302,600	(423,400)
Direct Material	1,044,000	1,044,000	-
Direct Labour	377,000	377,000	-
Variable Factory Overhead	446,600	446,600	-
Variable Selling and Administrative Expenses	220,400	84,100	(136,300)
Shipping Cost		145,000	145,000
Certification Cost		145,000	145,000
Income/ (Loss)	638,000	60,900	(577,100)
b.
Minimum Price per Unit Acceptable to to Brightstone
Particular	Amount
Direct Material	1,044,000
Direct Labour	377,000
Variable Factory Overhead	446,600
Variable Selling and Administrative Expenses	84,100
Shipping Cost	145,000
Certification Cost	145,000
Profit	638,000
Total Revenue acceptable	2,879,700
No of Units	29,000
Minimum Price per Unit acceptable	99.30