Decision on Accepting Additional Business
Miramar Tire and Rubber Company has capacity to produce 250,000 tires. Miramar presently produces and sells 200,000 tires for the North American market at a price of $40 per tire. Miramar is evaluating a special
order from a South American automobile company, Rio Motors. Rio Motors is offering to buy 40,000 tires for $20 per tire. Miramar’s accounting system indicates that the total cost per tire is as follows:
Direct materials $10.00
Direct Labor 5.00
Factory overhead (45% variable) 4.00
Selling and administrative expenses (75% variable) 3.00
Miramar pays a selling commission equal to 4% 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 $1.50 per tire. In addition, Rio has made the order conditional on Miramar Tire
Company receiving a Brazilian safety certification. Rio estimates that this certification would cost Miramar Tire $20,000.
When required, round all per unit answers to nearest cent. Enter all amounts as positive numbers.
a. Prepare a differential analysis report dated August 7, 2012, for the proposed sale to Rio Motors.
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