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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Dedsion on accepting additional business

Brightstone Tire and Rubber Company has capacity to produce 170,000 tires. Brightstone presently produces and sells 130,000 tires for the North American market at a price of $175 per tire. Brightstone is evaluating a special order from a European automobile company, Kuro Motors. Euro is offering to buy 20,000 tires for $116 per tire. Brightstone s accounting system indicates that the total cost per tire is as follows:

Direct materials $ 56
Direct labor 22
Factory overhead (60% variable) 25
Selling and administrative expenses (45% variable) 26
Total $129

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 $7.50 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $165,000.

a. Prepare a differential analysis dated January 21 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors.

b. What is the minimum price per unit that would be financially acceptable to Brightstone?

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Prepare: The differential analysis of Company BTR on January 21, to decide whether to reject or accept the proposal.

Explanation

The differential analysis of Company BTR on January 21, for the given alternatives is shown below.

Differential Analysis of Company BTR
Reject Order (Alt. 1) or Accept Order (Alt. 2)
January 21
Reject Order  (Alternative 1) Accept Order  (Alternative 2) Differential Effect on income
Revenues $0 (1)   $2,320,000 $2,320,000
Costs:    
   Direct Materials $0 (2)(-)$1,120,000 (-)  $1,120,000
   Direct Labor $0 (3) (-)  $440,000 (-)  $440,000
   Variable Factory Overhead $0 (4) (-)  $300,000 (-)  $300,000

   Variable selling and

   administrative expenses (5 years)

$0 (5)   (-)  $59,000 (-)  $59,000
   Shipping Cost $0 (6) (-)  $150,000 (-)  $150,000
   Certification Cost $0 (-)  $165,000 (-)  $165,000
Income (loss) $0 $86,000 $86,000

 Table (1)

The differential analysis of Company BTR on January 21 shows that accepting the order shall yield a greater income of $86,000. Hence, the order should be accepted.

Working Note:

Calculate the revenues from accepting the order.

Revenue = $116 × 20,000 tires= $2,320,000

(1)

Calculate the direct materials for fulfilling the order.

Direct Materials = $56 × 20,000 tires= $1,120,000

(2)

Calculate the direct labor for fulfilling the order

b)

To determine
The minimum price per unit which would be financially accepted by Company BTR.

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