Exercise 12-5 Ayayai Inc. has been manufacturing its own finials for its curtain
ID: 2567160 • Letter: E
Question
Exercise 12-5
Ayayai 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 50% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.50 and $4.50, respectively. Normal production is 25,000 curtain rods per year.
A supplier offers to make a pair of finials at a price of $12.75 per unit. If Ayayai accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $40,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.
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Exercise 12-5
Ayayai 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 50% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.50 and $4.50, respectively. Normal production is 25,000 curtain rods per year.
A supplier offers to make a pair of finials at a price of $12.75 per unit. If Ayayai accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $40,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.
Explanation / Answer
a Make Buy Net Income Increase (Decrease) Direct materials 87500 87500 Direct labor 112500 112500 Variable overhead costs 56250 56250 Fixed manufacturing costs 40000 40000 0 Purchase price 318750 -318750 Total cost 296250 358750 -62500 No Ayayai should not buy the finials. Yes, income would increase by $ 4500(67000-62500)
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