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 atthe rate of 56 % 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 31,100 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.30 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $47,500 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 eg. -45 or parentheses es. (45))

Answer 1

Incremental Analysis
	Make	Buy	Net Income Increase
Direct Material	124,400		124,400
Direct Labor	155,500		155,500
Variable overhead costs	87,080		87,080
Fixed manufacturing costs	47,500	47,500	-
Purchase price		413,630	(413,630)
Total annual cost	414,480	461,130	(46,650)
No, should noty buy finials
Yes, income would increase by 54,950-46,650 = $8,300

Since fixed costs will be incurred under both the cases, it is irrelevant