Question

Exercise 20-05 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 $4 and $5, respectively. Normal production is 25,400 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.20 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 finals will have to be absorbed by other products. Prepare the incremental analysis for the decision to make or buy the finals. (Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses .g. (45).) Net Income Increase (Decrease) Make Buy Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost

Answer 1

Please find below table useful to compute desired results: -

2 Make Buy AB Incremental analysis Net Income Increase (Decrease) 3 Direct materials =25400*4 =B3-C3 4 Direct labor =25400*5 =B4-C4 5 Variable Overhead costs =B4*0.69 =B5-C5 6 Fixed manufacturing costs 45000 45000 =B6-C6 7 Purchase price =25400*13.2 =B7-C7 8 Total annual cost =SUMB3:37) =SUM(C3:07) =B8-CS 9 10 No, Pottery Ranch should not buy the finials as the annual cost is higher rather than make the finials 12 13 Yes, Income would increase by =24650+DS

End results would be as follows: -

D Ε Make C Incremental analysis Buy 101,600 127.000 87.630 45,000 45,000 335,280 361,230 380,280 Net Income Increase Decrease) 101,600 127.000 87.630 3 Direct materials 4. Direct labor 5 Variable Overhead costs 6 Fixed manufacturing costs 7 Purchase price 8 Total annual cost (335,280) (19.050) 10 No, Pottery Ranch should not buy the finials as the annual cost is higher rather than make the finials 12 13 Yes, Income would increase by 5,600

Please ask multiple questions separately.