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 $13.30
per unit. If Pottery 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 | $enter direct materials in dollars | $enter direct materials in dollars | $enter direct materials in dollars | ||||
Direct labor | enter direct labor in dollars | enter direct labor in dollars | enter direct labor in dollars | ||||
Variable overhead costs | enter variable overhead costs in dollars | enter variable overhead costs in dollars | enter variable overhead costs in dollars | ||||
Fixed manufacturing costs | enter fixed manufacturing costs in dollars | enter fixed manufacturing costs in dollars | enter fixed manufacturing costs in dollars | ||||
Purchase price | enter the purchase price in dollars | enter the purchase price in dollars | enter the purchase price in dollars | ||||
Total annual cost | $enter total annual cost in dollars | $enter total annual cost in dollars | $enter total annual cost in dollars |
(b)
Should Pottery Ranch buy the finials?
select between Yes and NoNoYes YesNo, Pottery Ranch should select an optionnot buybuy buynot buy 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 $29,390?
select between Yes and NoNoYes YesNo, income would select an optiondecreaseincrease increasedecrease by $enter a dollar amount |
Solution a:
Differential Analysis- Pottery Ranch Inc. - Making finials (alt 1) or Buying finials (Alt2) | |||
Particulars | Making finials (Alt 1) | Buying Finials (Alt 2) | Financial advantage (Disadvantage) of buying (Alternative 2) |
Costs: | |||
Direct material | $101,600.00 | $0.00 | $101,600.00 |
Direct Labor | $127,000.00 | $0.00 | $127,000.00 |
Variable overhead Cost | $87,630.00 | $0.00 | $87,630.00 |
Fixed manufacturing costs | $40,400.00 | $40,400.00 | $0.00 |
Purchase Price (25400*$13.30) | $0.00 | $337,820.00 | -$337,820.00 |
Total Cost | $356,630.00 | $378,220.00 | -$21,590.00 |
Solution b:
No, Pottery ranch should not buy the finials.
Solution c:
Differential Analysis- Pottery Ranch Inc. - Making finials (alt 1) or Buying finials (Alt2) | |||
Particulars | Making finials (Alt 1) | Buying Finials (Alt 2) | Financial advantage (Disadvantage) of buying (Alternative 2) |
Costs: | |||
Direct material | $101,600.00 | $0.00 | $101,600.00 |
Direct Labor | $127,000.00 | $0.00 | $127,000.00 |
Variable overhead Cost | $87,630.00 | $0.00 | $87,630.00 |
Fixed manufacturing costs | $40,400.00 | $40,400.00 | $0.00 |
Purchase Price (25400*$13.30) | $0.00 | $337,820.00 | -$337,820.00 |
Income from productive capacity released | $0.00 | -$29,390.00 | $29,390.00 |
Total Cost | $356,630.00 | $348,830.00 | $7,800.00 |
Yes, income would increase by $7,800
Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is...
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 60% 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 26,600 curtain rods per year. A supplier offers to make a pair of finials at a price of...
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 61% 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 26,400 curtain rods per year. A supplier offers to make a pair of finials at a price of...
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 57% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.81 and $4.54, respectively. Normal production is 35,000 curtain rods per year. A supplier offers to make a pair of finials at a price of...
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 61% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.56 and $4.75, respectively. Normal production is 29,100 curtain rods per year. A supplier offers to make a pair of finials at a price of...
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...
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 atthe rate of 56 % 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 31,100 curtain rods per year. A supplier offers to make a pair of finials at a price...
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 65% 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 29,700 curtain rods per year. A supplier offers to make a pair of finials at a...
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...
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 54% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.92 and $4.64, respectively. Normal production is 26,000 curtain rods per year. A supplier offers to make a pair of finials at a...
Paused 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 51 % 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 31,700 curtain rods per year A supplier offers to make a pair of finials at...