Exercise 7-5 Pottery Ranch Inc. has been manufacturing its own finials for its c

Question

Exercise 7-5

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 51% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.74 and $4.69, respectively. Normal production is 31,700 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.04 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $46,900 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).)

Explanation / Answer

Make Buy Net Income Increase (Decrease) Direct materials 118558 118558 Direct labor 148673 148673 Variable manufacturing overhead 75823 75823 Fixed manuFacturing costs 46900 46900 0 Purchase cost 413368 -413368 Total cost 389954 460268 -70314 No, Pottery Ranch should not buy the finials.

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