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 currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 69% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.67 and $4.68, respectively. Normal production is 25,400 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.21 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.

(a)

Prepare an incremental analysis to decide if Pottery Ranch should buy the finials. (Round answers to 0 decimal places, e.g. 1250. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

(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 $47,022?

Make Buy Net Income
Increase (Decrease) Direct materials $

$

$

Direct labor

Variable overhead costs

Fixed manufacturing costs

Purchase price

Total annual cost $

$

$

Explanation / Answer

a Make Buy Net Income Increase (Decrease) Direct materials 93218 93218 Direct labor 118872 118872 Variable overhead costs 82022 82022 Fixed manufacturing costs 45000 45000 0 Purchase price 335534 -335534 Total annual cost 339112 380534 -41422 b No, Pottery Ranch should not buy the finials. c Yes income would increase by $5600 (47022-41422)

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.