Question

Miramar Tire and Rubber Company has capacity to produce 119,000 tires. Miramar presently produces and sells 91,000 tires for the North American market at a price of $99.00 per tire. Miramar is evaluating a special order from a South American automobile company, Ria Motors. Rio Motors is offering to buy 11,000 tires for $83.25 per tire. Miramar's accounting system indicates that the total cost per tire is as folows: Direct materials Direct labor Factory overhead (70% variable) Selling and administrative expenses (30% variable) Total 538 23 20 $95 Miramar pa s a sales commiss on equal to 5% of t e seling price on North American arders, whichis n uded in the variable portion of the selling and adm?n strative expenses. However, this special order would not havea sales comm saan. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $5.00 per tire. In addition, Rio has made the order conditional on Miramar Tire and Rubber Company receiving a Brazilian safety certification. Rio estimates that this certification would cost Miramar Tire $72,800

a. Prepare a differential analysis report for the proposed sale to Rio Motors, Round your answers to the nearest cent.
b. What is the minimum price per unit that would be financially acceptable to mirama?Round your answers to the nearest cent.

Answer 1

a) spare capacity = 119,000 - 91,000 = 28,000 tires

normal sales price $99 per tire

special order for 11,000 at $83.25

Direct materials $38

Direct labor $14

Factory overhead (70% variable) $23

Selling and administrative expenses (30% variable) $20

Total $95

total avoidable costs = ($23 x 30%) + ($20 x 70%) = $20.90

total unavoidable costs = $74.10

additional costs related to the special order $5 per tire (shipping costs) + $72,800 in total

accept special reject special differential

order order amount

sales revenue $915,750 $0 $915,750

variable prod. costs ($815,100) $0 ($815,100)

variable costs ($55,000) $0 ($55,000)

associated to special order

certification costs ($72,800) $0 ($72,800)

associated to special order

total ($27,150) $0 ($27,150)

b) minimum price per unit = ($27,150 / 11,000) + $83.25 = $85.7182 ≈ $85.72