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 is charged to production at the rate of 70% of direct labor cost. The direct materials and the direct labor cost

per unit to make a pair of finials are $4 and $5, respectively. Normal production is 30,000 curtain rods per year.

A supplier offers to make a pair of finials at a price of $12.95 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing

costs will be eliminated, but the $45,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by

other products.

Instructions

(a)

Prepare the incremental analysis for the decision to make or buy the finials.

(b)

Should Pottery Ranch buy 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 $20,000?

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Prepare the incremental analysis for the decision to make or buy the finials.

Make

Buy

Net income Increase (Decrease)

Direct materials

$value

Value

Value

Direct labor

$Value

Value

Value

Variable overhead costs

?

Value

Value

Fixed manufacturing costs

Value

Value

Value

Purchase price

?

Value

Value

Total annual costs

?

?

?

(b)

Should Pottery Ranch buy 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 $20,000.

Make

Buy

Net income Increase (Decrease)

Total annual cost (above)

Value

Value

Value

Opportunity cost

Value

Value

Total cost

?

?

?

Answer 1

		Pottery Ranch Inc.
	Currently Operated at 100% Capacity
	Variable Overhead charged to production =70% of direct labor cost
	Direct Material(Per Unit)	4
	Direct Labor (Per Unit)	5
	Normal Production(Curtain Rods)	30000
	A supplier's Offer Price	12.95
	Fixed Overheads charged to finials	45000
		Pottery Ranch Inc.
		Incremental Analysis
		Make	Buy	Net Income Increase/Decrease
a)	Direct Material	$ 120,000.00		$                                       120,000.00
	Direct Labor	$ 150,000.00		$                                       150,000.00
	Variable Overhead	$ 105,000.00		$                                       105,000.00
	Fixed Overhead	$    45,000.00	$    45,000.00	$                                                        -
	Purchase Price=(30000*12.95)		$ 388,500.00	$                                    (388,500.00)
	Total Annual Cost	$ 420,000.00	$ 433,500.00	$                                       (13,500.00)
b)	No Pottery Ranch should not buy Finials
C )	If production capacity is used not to produce but used to produce income of $20,000 will result increase in income of ($20000-$13500)=$6500