Question

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 $12.79 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $46,700 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 labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost (b) Should Pottery Ranch buy the finials? Pottery Ranch should the finials. Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $71,427? income would by $

Answer 1

a.

	Make	Buy	Net income increase (decrease)
Direct materials	$133,350	$0	$133,350
Direct labor	158,900	0	158,900
Variable overhead cost ($158,900*57%)	90,573	0	90,573
Fixed manufacturing costs	46,700	46,700	0
Purchase price (35,000*$12.79)		447,650	-447,650
Total annual cost	$429,523	$494,350	-$64,827

b.

No. Pottery Ranch should not buy the finials.

c.

Yes, income would increase by $6,600 ($71,427-64,827)