Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods.

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 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 $13.46 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 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).)

(b)

Should Pottery Ranch buy the finials?

Make        Buy        Net Income
Increase (Decrease) Direct materials $       $ $ Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost $ $ $

Explanation / Answer

Answer to Part (a):

Incremental Analysis:

Particulars

Make ($)

Buy ($)

Net Income Increase (decrease) ($)

Direct Material

103596 (3.56 * 29100)

(103596)

Direct Labor

138225 (4.75 * 29100)

(138225)

Variable Overhead Costs

84317.25 (4.75 * 61%)

(84317.25)

Fixed Manufacturing Costs

40400

40400

Nil

Purchase Price

391686 (13.46 * 29100)

391686

Total Annual Cost

366538.25

432086

(65547.75)

Answer to part (b):

Since net income decreases while buying finials, it would be better to make the finials.

Particulars

Make ($)

Buy ($)

Net Income Increase (decrease) ($)

Direct Material

103596 (3.56 * 29100)

(103596)

Direct Labor

138225 (4.75 * 29100)

(138225)

Variable Overhead Costs

84317.25 (4.75 * 61%)

(84317.25)

Fixed Manufacturing Costs

40400

40400

Nil

Purchase Price

391686 (13.46 * 29100)

391686

Total Annual Cost

366538.25

432086

(65547.75)

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