Goodman Tire and Rubber Company has capacity to produce 170,000 tires. Goodman presently produces and sells 130,000 tires

Goodman Tire and Rubber Company has capacity to produce 170,000 tires. Goodman presently produces and sells 130,000 tires for the North American market at a price of $125 per tire. Goodman is evaluating a special order from a European automobile company,  Euro Motors. Euro is offering to buy 20,000 tires for $92 per tire. Goodman’s accounting system indicates that the total cost per tire is as follows:

Direct materials                                   $38

Direct labor                                        16

Factory overhead (60% variable)                     24

Selling and administrative expenses (45% variable)  20

Total                                              $98

Goodman 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 $6.50 per tire. In addition, Euro has made the order conditional on receiving European safety certification. Goodman estimates that this certification would cost $142,000.

a. Prepare a differential analysis dated January 21, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order from Euro Motors.

b. What is the minimum price per unit that would be financially acceptable to Goodman?

Answer:

Differential Analysis 

Reject Order (Alt. 1) or Accept Order (Alt. 2) 

January 21, 2014 

Reject 

Order 

(Alternative 1) 

Revenues $0 $1,840,000 C

osts:    

Direct materials 0 –760,000 D

irect labor 0 –320,000 V

ariable factory overhead 0 –288,000 V

ariable selling and admin.    

expenses 0 –55,000 S

hipping costs 0 –130,000 C

ertification costs 0 –142,000 –142,000 

Income (Loss) $0 $   145,000 $   145,000 

    

20,000 tires × $92 per tire 

20,000 tires × $38 per tire 

20,000 tires × $16 per tire 

20,000 tires × ($24 per tire × 60%) 

20,000 tires × [($20 per tire × 45%) – ($125 × 5%)*] 

20,000 tires × $6.50 per tire 

* 5% × $125. The avoided sales commission should not be computed on the basis 

of the $92 price to Euro Motors, but on the existing domestic sales price of $125. 

Goodman should accept the special order from Euro Motors. 

b. $92 – $145,000 

20,000