Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods.
ID: 2467907 • Letter: P
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 60% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.96 and $4.90, respectively. Normal production is 26,000 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.24 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $46,900 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. Prepare an incremental analysis to decide if Pottery Ranch should buy the finials. Should Pottery Ranch buy 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 $42,240?Explanation / Answer
a) Make Buy Net Income Increase/ ( Decrease) Direct Material 3.96 0 -3.96 Direct labor 4.9 0 -4.9 Variable overhead cost 2.94 0 -2.94 Fixed Manufacturing cost ( 46900/26000) 1.80 1.80 0 purchase price 13.24 13.24 Total cost 13.60 15.04 1.44 Number of units 26000 26000 0 Total annual cost 353700 391140 37440 -4800 b) Pottery Ranch should not buy the finials as the annual cost is higher when you buy rather than when you make the finials c) Yes the answer would be different , because the additional cost of buying the finilas is 37440 and the additional income is 42240 by not producing the finials hence there is an incremental income of 42240 - 37440 = 4800 . Hence if the released capacity produces an income of 42240 , Pottery Ranch should buy the finials from the vendor
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