Question

Exercise 21-5 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 68% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.85 and $4.97, respectively. Normal production is 25,300 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.96 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $46,400 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. 1,225. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost (b) Should Pottery Ranch buy the finials? L ', Pottery Ranch 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 $23,738? L 'income would by $

Answer 1

Answers Page No o @ are onemental andlysis to decide of lettery Ranch should buy the finals :- Make direct materials = 25300 x $ 3.85 = $94405 direct fabos = 205300 $ 4094 = $125741 Variable overhead costs = 684 x $ 125741 < $ 85503.88 a $85504 fixed manufacturing costs - $46,400 fined manufacturing conf = $46,400 Purchase poice = $12.96 per unit x 25300) = $ 327888 Make Buy Wet income increas (de Direct materials $94405 $97405 Direct labor $ 125741 $ 125741 Variable overhead costs $ 85504 $ 85504 fixed manufacturing costs $46400 $46400 Purchase price $324888 ($324888) Total annual cost $ 355050 $374288 ($19238)

Page No @ should Pottery Ranch brey the firials ? Nos Pottery Ranch rohould not boy bole trials © [Yes, Income could increase by $4500 Oppoolanting coef - $ 23,438 Niet frncome increase Cover sease) Total annual cool $355050 $374288 ($19238) Opportunily cost $23738 $23738 Total cost $378788 $374288 $ 4500 Make I Buy