Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 67

Decision 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, Euro 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:

Brightstone pays a selling commission equal to 5% of the selling price on North Americans 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 would be financially acceptable to Brightstone