Question

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:

Direct materials $44
Direct labor 16
Factory overhead (70% variable) 26
Selling and administrative expenses (40% variable) 23
Total $109
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.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
July 31
Reject Order (Alternative 1) Accept Order (Alternative 2) Differential Effect on Income (Alternative 2)
Revenues $ $ $
Costs:
Direct materials
Direct labor
Variable factory overhead
Variable selling and admin. expenses
Shipping costs
Certification costs
Income (Loss) $ $ $
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.

Answer 1

Answer:

Differential Analysis  :

                                       Reject Order     Accept Order     Differential Effect  

Revenues                        14,260,000         16,119,150               1,859,150

Costs:

Direct materials                 5,456,000        6,292,000                836,000

Direct labor                         1,984,000        2,288,000                304,000

Variable  overhead            3,224,000        3,569,800                345,800

Variable selling                 2,852,000        3,004,950                152,950

Shipping costs                          0                      114,000                114,000

Certification costs                     0                     115,900                 115,900

Income (Loss)                      744,000             734,500                 (9,500)

Conclusion :

Reject the special order from Autobahn Motors (this will result in a loss of $9,500)

Minimum Price :  $98.35

Explanation:

Minimum price per unit that would be financially acceptable to Talladega should cover all variable costs related to acceptance of the special order.

Minimum Price :

Direct materials                                                                $44.00

Direct labor                                                                       $16.00

Variable factory overhead  $26 × 70%                           $18.20

Variable selling and admin. expenses  $23 × 35%        $8.05

Shipping costs                                                                  $6.00

Certification costs 115,900 / 19,000                                $6.10

Total                                                                                 $98.35