Question

Decision on Accepting Additional Business

Miramar Tire and Rubber Company has capacity to produce 238,000 tires. Miramar presently produces and sells 182,000 tires for the North American market at a price of $101.00 per tire. Miramar is evaluating a special order from a South American automobile company, Rio Motors. Rio Motors is offering to buy 28,000 tires for $82.05 per tire. Miramar’s accounting system indicates that the total cost per tire is as follows:

Direct materials	$38
Direct labor	14
Factory overhead (60% variable)	23
Selling and administrative expenses (30% variable)	20
Total	$95

Miramar pays a sales 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 $6.00 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 $151,200.

a. Prepare a differential analysis report for the proposed sale to Rio Motors. Round your answers to the nearest cent.

Miramar Tire And Rubber Company
Sell to Rio Motors
Differential Analysis Report
	Per Unit	Total
Differential revenue from accepting special offer	$	$
Differential costs from accepting special offer: (Enter per unit cost amounts as positive values; enter the per unit cost savings as a negative value).
	$
	$	$
Total differential costs		$
		$

b. What is the minimum price per unit that would be financially acceptable to Miramar? Round your answer to the nearest cent.
$

Answer 1

Solution a:

Miramar Tire And Rubber Company
Sell to Rio Motors
Differential Analysis Report
	Per Unit	Total
Differential revenue from accepting special offer	$82.05	$2,297,400.00
Differential costs from accepting special offer:
(Enter per unit cost amounts as positive values; enter the per unit cost savings as a negative value).
Direct materials	$38.00	$1,064,000.00
Direct labor	$14.00	$392,000.00
Variable factory overhead	$13.80	$386,400.00
Variable selling and administrative expenses (20*30% - 101*5%)	$0.95	$26,600.00
Additional shipping cost	$6.00	$168,000.00
Certification costs		$151,200.00
Total differential costs		$2,188,200.00
Income from special order		$109,200.00

Solution b:

Minimum price acceptable to Mirmar = Relevant cost of special order / Nos of units

= $2,188,200 / 28000 = $78.15 per unit