Decision on Accepting Additional Business
Talladega Tire and Rubber Company has capacity to produce 221,000 tires. Talladega presently produces and sells 169,000 tires for the North American market at a price of $114 per tire. Talladega is evaluating a special order from a European automobile company, Autobahn Motors. Autobahn is offering to buy 26,000 tires for $92.8 per tire. Talladega’s accounting system indicates that the total cost per tire is as follows:
|Factory overhead (70% variable)||26|
|Selling and administrative expenses (30% variable)||23|
Talladega 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 $6 per tire. In addition, Autobahn has made the order conditional on receiving European safety certification. Talladega estimates that this certification would cost $156,000.
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 “0”. If required, round interim calculations to two decimal places.
|Reject Order (Alt. 1) or Accept Order (Alt. 2)|
|Reject Order (Alternative 1)||Accept Order (Alternative 2)||Differential Effect on Income (Alternative 2)|
|Variable factory overhead|
|Variable selling and admin. expenses|
a. Subtract the additional costs (each unit cost multiplied by 26,000 tires) from the additional revenue ($92.8 per tire multiplied by the number of tires in the offer). The variable selling and administrative expenses are 30% of $23 per tire, less 5% of $114 sales commission per unit.
Learning Objective 1.
Determine whether to reject (Alternative 1) or accept (Alternative 2) the special order from Autobahn Motors.
Accept the special order
b. What is the minimum price per unit that would be financially acceptable to Talladega? Round your answer to two decimal places.
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