Question

Whispering Winds 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 61% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $4 and $5, respectively. Normal production is 26,400 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.45 per unit. If Whispering Winds accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $40,400 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. (a) Prepare the incremental analysis for the decision to make or buy the finials. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Buy Net Income Increase (Decrease) Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost (b) Should Whispering Winds buy the finials? Whispering Winds should 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 $43,960? income would by $

Answer 1

a
	Make	Buy	Net income Increase (Decrease)
Direct materials	105600		105600
Direct labor	132000		132000
Variable overhead costs	80520		80520
Fixed manufacturing costs	40400	40400	0
Purchase price	0	355080	-355080
Total annual costs	358520	395480	-36960
b
No, Pottery Ranch should not buy the finials
c
Change in income = 43960-36960= $7000
Yes, income would increase by $7000
Formulas used:
	Make	Buy
Direct materials	=26400*4
Direct labor	=26400*5
Variable overhead costs	=132000*61%
Purchase price		=26400*13.45