Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods.

Question

Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is curently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 57% of direct labor cost The direct materials and direct labor cost per unit to make a pair of finials are $3.81 and $4.54, respectively. Normal production is 35,000 curtain rods per year A supplier offers to make a pair of finials at a price of $12.79 per unit. If pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the 46,700 offixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. Prepare an incremental analysis to decide if Pottery Ranch should buy the finials. (Round answers to O decimal places, e.g. 12so. Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Net Income Make Buy Increase (Decrease) 133 Direct materials Direct labor Variable overhead costs Fixed manufacturing costs46 Purchase price Total annual cost 13335 90573 90573 467 447650 44765 (64827) Should Pottery Ranch buy the finials? No t Pottery Ranch should not buy Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $71,427? Yes 64827 income would I increase by s

Explanation / Answer

Current Total Cost of ''Buy'' alternative = $494,350
Idle capacity will be used to derive additional Income of $71,427
Hence, the Net Cost of ''Buy'' alternative will be = 494350 - 71427 = $422,923

Cost of ''make'' option = $429,523

Increase in Net Income if ''Buy'' alternative is adopted = 422923 - 429523 = $6,600

Hence, the correct answer for Part C will be: YES, income would increase by $6,600

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