# 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?

### Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

### Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

#### Solutions

Chapter
Section
Chapter 25, Problem 25.15EX
Textbook Problem

## Dedsion on accepting additional businessBrightstone 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?

Expert Solution

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 of Solution

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

Expert Solution

b)

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

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