Exercise 12-5 Novak Inc. has been manufacturing its own finials or its curtain r

Question

Exercise 12-5 Novak Inc. has been manufacturing its own finials or its curtain rods. The company is currently operating at 100% o 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 $3.85 and $4.75, respectively, Normal production is 29,700 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.06 per unit. If Novak accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $43,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products. Your answer is partially correct. Try again. Prepare the incremental analysis for the decision to make or buy the finials. (Round answers to 0 decimal places, e.g. 1250. If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Net Income Make Buy Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Increase (Decrease) 14,345.00 141,075 1,699 14,345 141,075 1,699 87,882 387,882.00 Total annual cost 347,119 87,882 5T40,763.25 Your answer is correct. Should Novak buy the finials? Novak should hot buy the finials.

Explanation / Answer

1)

Variable overhead costs

(65% of labour cost)

No, Novak should not buy the finials from supplier because it costs more from buying.

It is better to manufacture as its costs less cost

Make Buy Net income Increase or (Decrease) Direct materials 114345 0 114345 Direct labour 141075 0 141075

Variable overhead costs

(65% of labour cost)

91699 0 91699 Fixed manufactuing costs 43,000 43000 0 Purchase price 0 387882 (387882) Total annual cost 390119 430882 (40763)

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