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 56% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.91 and $4.88, respectively. Normal production is 31,100 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.31 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $47,500 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.

Exercise 21-5 Pottery Ranch Inc. has been manufacturing its own finals 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 56% of direct labor cost. The direct materials and direct labor cost per unitt make apa of al are S39 and $4.88, respectively. Normal production is 31,100 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.31 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $47,500 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. (Round answers to 0 decimal places, e.g. 1,225. Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Net Income Increase (Decrease) Make Direct materials Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost

Explanation / Answer

Solution a:

Solution b:

No, Pottery Ranch should not buy the Finials as the net income will decrease by $55,582.

Solution c:

If the productive capacity released by not making the finials could be used to produce income of $63,882,then:

Net increase in Income = Income from utilizing the released capacity - loss from buying = $63,882 - $55,582 = $8,300.

Threfore in this case, Pottery ranch should buy the Finials as Income would increase by $8,300.

Incremental Analysis Particulars Make Buy Net Income Increase/ (Decrease) Direct material $121,601 $0 $121,601 Direct Labor $151,768 $0 $151,768 Variable overhead $84,990 $0 $84,990 Fixed manufacturing costs $0 $0 $0 Purchase Price (31,100*$13.31) $0 $413,941 -$413,941 Total Annual Cost $358,359 $413,941 -$55,582

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