Question

Question 4 Pottery Ranch Inc. has been manufacturing its own finials for its curtain rads. The company is currently oacrating at 100% af 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 or finials are $4 and $5, respectively. Narrnal production is 29,100 curtain rods per year. A supplier offers to make a pair of finials at a price af $13.45 per unit. If Pattery Ranch 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).) Make Buy Net Income Increase (Decrease) Direct materials Direct labar Variable overhead costs Fixed manufacturing casts Purchase price Total annual cost (b) Should Pottery Ranch buy the finials? Pottery Ranch should the finals Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $45,440? De Incarme would bys

Answer 1

a
	Make	Buy	Net income Increase (Decrease)
Direct materials	116400		116400
Direct labor	145500		145500
Variable overhead costs	88755		88755
Fixed manufacturing costs	40400	40400	0
Purchase price	0	391395	-391395
Total annual costs	391055	431795	-40740
b
No, Pottery Ranch should not buy the finials
c
Change in income = 45440-40740= $4700
Yes income would increase by $4700
Formulas used:
	Make	Buy
Direct materials	=29100*4
Direct labor	=29100*5
Variable overhead costs	=145500*61%
Purchase price		=29100*13.45