Question

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Exercise 20-5 Pottery Ranch Inc. has been manufacturing its own finals 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 Finals are $3.89 and $5.00, respectively. Normal production is 26,600 curtain rods per year. A supplier offers to make a pair of Finals at a price of $13.32 per unit. If Pottery Ranch accepts the supplier's offer, all Variable manufacturing costs will be eliminated, but the $45.100 of fixed manufacturing overhead currently being charged to the finals will have to be absorbed by other products. (a) Prepare an incremental analysis to decide if Pottery Ranch should buy the finals. (Round answers to o decimal places, e.. 1250. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Net Income Increase (Decrease) Make Buy Direct materials Direct labor Variable overhead costs Fixed manufacturing costs 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 finals could be used to produce income of $33,568? income would Click if you would like to Show Work for this question: Open Show Work
Exercise 20-5

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 69% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.89 and $5.00, respectively. Normal production is 26,600 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.32 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,100 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. 1250. 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?

YesNo , Pottery Ranch should not buybuy 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 $33,568?

YesNo , income would decreaseincrease by $

Answer 1

						Net Income
a)				Make	Buy	Inc (Decrease)
	Direct Materials			103474		103474
	Direct Labor			133000		133000
	Variable overhead costs			91770		91770
	Fixed manufacturing costs			45,100	45,100	0
	Purchase price				354312	-354312
	Total annual cost			373344	399412	-26068
b)	No,	Pottery Ranch Should		not buy	the finials
c)	Yes	income would		increase by	7500