Brightstone Tire and Rubber Company has capacity to produce 204,000 tires. Brightstone presently produces and sells 156,000 tires for the North American market at a price of $100 per tire. Brightstone is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 24,000 tires for $86.5 per tire. Brightstone's accounting system indicates that the total cost per tire is as follows:

Direct materials $54
Direct labor 24
Factory overhead (62% variable) 24
Selling and administrative expenses (44% variable) 25
Total $127.00

Brightstone pays a selling commission equal to 4% 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 $7.65 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Brightstone estimates that this certification would cost $165,424.

Required:
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. Determine whether the company should reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors
c. What is the minimum price per unit that would be financially acceptable to Brightstone?

Answer:

Brightstone Tire and Rubber Company

a. Differential Analysis dated January 21

                                                  Alternative 1         Alternative 2

                                                      Reject                   Accept

Revenue from special order   ($2,076,000)        $2,076,000

Avoidable costs                           2,493,120            2,831,520

Cost Differential                           ($417,120)          ($755,520)

b. The company should reject the special order from Euro Motors as it will incur more costs when it accepts than when it rejects the special order.

c. The minimum price per unit that would be financially acceptable to Brightstone is $117.98.

Explanation:

a) Data and Calculations:

Production capacity in tires = 204,000

Current production and sales units = 156,000

Selling price per tire for the North American market = $100

Special order of 24,000 tires from Euro Motors = $86.50 per tire

Total cost per tire:                                                      Total     Variable

Direct materials                                                          $54         $54

Direct labor                                                                   24           24

Factory overhead (62% variable)                                24            14.88

Selling and administrative expenses (44% variable) 25             11

Total                                                                          $127.00  $103.88

Special Order:

Offer price =                    $86.50

                                                               Reject                   Accept

Variable cost per unit    $103.88        $2,493,120          

Less selling commission    (0.44)

Additional shipping cost      7.65

Cost of certification             6.89

Total per unit costs =      $117.98                                    $2,813,520

Operating income (loss) ($31.48)

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2
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.مصاريف إدارية 65 دينار والتأمين على القرض 115 دينار
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* :قيمة الفائدة السنوية -1
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* :قيمة الفائدة الإجمالية -2
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Beginning inventory of merchandise
Cost, $40,000
Retail, $360,000
Purchases during the period
Cost, $1,000,000
Retail, $10,000,000
Transportation in, $50,000
Transportation out, $32,000
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Cost, $20,000
Retail, $196,000
Net additional markups, $800,000
Net markdowns, $500,000
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Using the information above, compute the amounts to be reported in the financial statements for ending inventory and cost of goods sold for the department. The spreadsheet below has been started for you. Line items have been entered in column A. In columns B and C, enter appropriate amounts as well as intermediate subtotals directly below the amounts leading to the subtotal. Include the cost to retail calculation as well as your two amounts for financial statement reporting. Round the cost to retail ratio to four decimal places and include the "0" preceding the decimal point. Enter 0 where no other entry is appropriate.
A1 lock copy cut paste
A B C
1 Line Item Description Cost Retail
2 Beginning inventory $40,000
3 Purchases
4 Transportation in
5 Purchases returns
6 Net purchases
7 Net additional markups
8 Cost to retail ratio components
9 Net markdowns
10 Sales
11 Ending inventory, retail
12 Set up Calculation
13 Cost to retail ratio
14 Ending inventory, cost
15 Cost of goods sold

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