Question

Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 56% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $4 and $5, respectively. Normal production is 25,800 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.30 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $46,100 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. (a) Prepare the incremental analysis for the decision to make or buy the finials. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Direct materials $ $ $ Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost $ $ $ (b) Should Pottery Ranch buy the finials? , Pottery Ranch should the finials. (c) Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $44,500? , income would by $

Answer 1

	Make	Buy	Net Income Increase
Direct material	103,200		103,200
Direct labor	129,000		129,000
Variable overhead Costs	72,240		72,240
Fixed Overhead Costs	46,100	46,100	-
Purchase price		343,140	(343,140)
Total Annual Cost	350,540	389,240	(38,700)
No, Should not purchase
c. Yes, answer will be different since incremental income = 44,500-38,700 = $5,800