Sure Grip Tire and Rubber Company has capacity to produce 170,000 tires. Sure Grip presently produces and sells 130,000 tires for the North American market at a price of $90 per tire. Sure Grip is evaluating a special order from a European automobile company, Continental Motors. Continental is offering to buy 25,000 tires for $60 per tire. Sure Grip’s accounting system indicates that the total cost per tire is as follows:
|
Direct materials |
$26 |
|
Direct labor |
9 |
|
Factory overhead (35% variable) |
22 |
|
Selling and administrative expenses (40% variable) |
18 |
|
Total |
$75 |
Sure Grip 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, Continental has made the order conditional on receiving European safety certification. Sure Grip estimates that this certification would cost $110,000.
a. Prepare a differential analysis report dated August 4, 2008, for the proposed sale to Continental Motors.
b. What is the minimum price per unit that would be financially acceptable to Sure Grip?