Roadworthy Tire and Rubber Company has capacity to produce 170,000 tires. Roadworthy presently produces and sells 130,000
Question:
Roadworthy Tire and Rubber Company has capacity to produce 170,000 tires. Roadworthy presently produces and sells 130,000 tires for the North American market at a price of $90 per tire. Roadworthy is evaluating a special order from a European automobile company, Euro Motors. Euro is offering to buy 25,000 tires for $75 per tire. Roadworthy’s accounting system indicates that the total cost per tire is as follows:
Direct materials ……………………………………..................…..…… $32
Direct labor ……………………….……………….......................……….... 8
Factory overhead (60% variable) …………….........……………….. 25
Selling and administrative expenses (35% variable) ………… 20
Total ……………………………………………….......................…………. $85
Roadworthy 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 $6.00 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Roadworthy estimates that this certification would cost $125,000.
(a) Prepare a differential analysis report dated May 4, 2010, for the proposed sale to Euro Motors.
(b) What is the minimum price per unit that would be financially acceptable to Roadworthy?
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