Question

Decision on Accepting Additional Business

Talladega Tire and Rubber Company has capacity to produce 500,000 tires. Talladega presently produces and sells 400,000 tires for the North American market at a price of $200 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 100,000 tires for $150 per tire. Talladega's accounting system indicates that the total cost per tire is as follows:

Direct materials	$75
Direct labor	20
Factory overhead (70% variable)	30
Selling and administrative expenses (60% variable)	18
Total	$143

Talladega pays a selling commission equal to 3% 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 $3 per tire. In addition, Autobahn has made the order conditional on receiving European safety certification. Talladega estimates that this certification would cost $400,000.

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 "0". 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 Effects (Alternative 2)
Revenues	$	$	$
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling and admin. expenses
Shipping costs
Certification costs
Profit (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

Differential Analysis Reject order (Alt. 1 ) or Accept order (Alt. 2 ) July 31
Particulars	Reject order (Alternative 1)	Accept order (Alternative 2)	Differencial Effects (Alternative 2)
Revenues	$ 0	$ 15,000,000 ( 100,000 x $ 150 )	$ 15,000,000
Costs:
Direct material     ( 100,000 x $ 75 )	$ 0	($ 7,500,000)	($ 7,500,000)
Direct labor     ( 100,000 x $ 20 )	$ 0	($ 2,000,000)	($ 2,000,000)
Variable factory overhead      ( 100,000 x $ 30 x 70% )	$ 0	($ 2,100,000)	($ 2,100,000)
Variable selling and admin. Expenses          100,000 x ( 18 x 60%   (-) ( $ 200 x 3% ) )	$ 0	($ 480,000 )	($ 480,000 )
Shipping costs     ( 100,000 x $ 3 )	$ 0	($ 300,000)	($ 300,000)
Certification costs	$ 0	($ 400,000)	($ 400,000)
Profit (Loss)	$ 0	$ 2,220,000	$ 2,220,000
Since there is a Increase in Net Income, Company should Accept the special order.
(b)
Minimum Price per unit            = Total Costs / Total Units            = $ 12,780,000 / 100,000	$ 127.80 per Unit