Homework SourseTalladega Tire and Rubber Company has capacity to produce 16
Talladega Tire and Rubber Company has capacity to produce 162,000 tires. Talladega presently produces and sells 124,000 tires for the North American market at a price of $115 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 19,000 tires for $97.85 per tire. Talladega’s accounting system indicates that the total cost per tire is as follows:
Talladega pays a selling commission equal to 5% oof 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 $115,900.
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 zero \"0\". If required, round interim calculations to two decimal places.
Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Autobahn Motors.
What is the minimum price per unit that would be financially acceptable to Talladega? Round your answer to two decimal places.
| Direct materials | $44 |
| Direct labor | 16 |
| Factory overhead (70% variable) | 26 |
| Selling and administrative expenses (40% variable) | 23 |
| Total | $109 |
Solution
The special order can be accepted as the special order is giving an extra income of $61,608.
The minimum price that would be acceptable for this order will be $94.61 --- $97.85 - ($61608/19000)
| Differential Analysis | |||
| Reject Order (Alt. 1) or Accept Order (Alt. 2) | |||
| Jul-31 | |||
| Reject Order (Alternative 1) | Accept Order (Alternative 2) | Differential Effect on Income (Alternative 2) | |
| Revenues (i) | 14260000 | 16119150 | 1859150 |
| Costs: | |||
| Direct materials (ii) | 5456000 | 6292000 | -836000 |
| Direct labor (iii) | 1984000 | 2288000 | -304000 |
| Variable factory overhead (iv) | 2256800 | 2602600 | -345800 |
| Variable selling and admin. Expenses (v) | 1140800 | 1222643 | -81843 |
| Shipping costs | 114000 | -114000 | |
| Certification costs | 115900 | -115900 | |
| Income (Loss) | 3422400 | 3484008 | 61608 |
| Workings: | |||
| Alternative 1 | Alternative 2 | ||
| Unit sales for the alternatives | 124000 | 143000 | |
| Revenues @$115 per tire for 124,000 tires | 14260000 | 14260000 | |
| Revenues @$97.85 per tire for 19,000 tires | 1859150 | ||
| Total Revenues (i) | 14260000 | 16119150 | |
| Direct material @$44 per unit (ii) | 5456000 | 6292000 | |
| Direct labor @$16 per unit (iii) | 1984000 | 2288000 | |
| Variable protion of factory overhead is 70% of $26.00 i.e., $$18.20 per unit. | |||
| Variable factory overhead (iv) | 2256800 | 2602600 | |
| Variable portion of selling overhead is 40% of $23.00 i.e., $9.20 per unit. | |||
| Variable selling and admin. Expenses ( v) | 1140800 | 1222643 | |
| Variable selling and admin. Expenses for the overseas order | |||
| = 143,000 x $9.20 - 19,000 x 97.85 x 5% |
