Reference no: EM132551047

A company has capacity to produce 170,000 tires. The company presently produces and sells 130,000 tires for the North America market at a point of $175 per tire. The company is evaluating a special order from a European automobile company. The European company is offering to buy 20,000 tires for $116 per tire.The American company accounting system indicates that the total cost per tire is as follow:

Direct materials $56.00

Direct labor 22.00

Factory overhead (60% variable) 25.00

Selling and admin expenses (45% variable) 26.00

Total $129.00

• The American company pays a selling commission equal to 5% of the selling price on the North American orders, which is included in the variable portion of the selling and admin expenses. However, this special order would not have sales commission. If the order was accepted, the tires would be shipped overseas for an additional shipping cost of $7.50 perr tire. In addition, the European company has made the order condtional on receiving European safety cortication. The American company estimates that this certification would cost $165,000.

Question a. Bifferential analysis dated January 12 on whether to reject (Alternative 1) or accept (Alternative 2) the special order from the European company.

Question b. What is the minimum price per unit that would be financially acceptable to the American company.