Question

E7.5 (LO 3), AN Pottery Ranch Inc. has been manufacturing its own finials for its curtain rode The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost her! unit to make a pair of finials are $4 and $5, respectively. Normal production is 30,000 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.95 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $45.000 of fixed manuts turing overhead currently being charged to the finials will have to be absorbed by other products. o noso see Instructions blo o d 000. Colib 0082 bin no no a. Prepare the incremental analysis for the decision to make or buy the finials. b. Should Pottery Ranch buy the finials? collo no logo c. Would your answer be different in (b) if the productive capacity released by could be used to produce income of $20,000? I by not making the fini

Answer 1

Incremental Analysis
	Make	Buy	Net Income Increase
Direct Material	120,000		120,000
Direct Labor	150,000		150,000
Variable overhead costs	105,000		105,000
Fixed manufacturing costs	45,000	45,000	0
Purchase price		388,500	-388,500
Total annual cost	420,000	433,500	-13,500
No, should not buy finials
Yes, income would increase by 20,000-13,500 = $6,500

Answer 2

Schopp Inc. has been manufacturing its own shades for its table lamps. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $4 and $5, respectively. Normal production is 30,000 table lamps per year. A supplier offers to make the lamp shades at a price of $12.75 per unit. If Schopp Inc. 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 lamp shades will have to be absorbed by other products. Instructions (a) Prepare the incremental analysis for the decision to make or buy the lamp shades. (b) Should Schopp Inc. buy the lamp shades? (c) Would your answer be different in (b) if the productive capacity released by not making the lamp shades could be used to produce income of $25,000?