Exercise 20-5 Pottery Ranch Inc. has been manufacturing its own finials for its
ID: 2552835 • Letter: E
Question
Exercise 20-5
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 $3.98 and $4.74, respectively. Normal production is 26,400 curtain rods per year.
A supplier offers to make a pair of finials at a price of $13.44 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).)
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?
Yes
No
, Pottery Ranch should
not buy
buy
the finials.
(c)
Would your answer be different in (b) if the productive capacity released by not making the finials could be used to produce income of $55,275?
No
Yes
, income would
increase
decrease
by $
Explanation / Answer
(a) Make Buy Inc / (Dec) Remarks Direct materials 105,072.00 (105,072.00) 26400 x 3.98 Direct labor 125,136.00 (125,136.00) 26400 x 4.74 Variable Mfg OH 35,932.96 (35,932.96) (125136 * 61% )-40400 Fixed mfg costs 40,400.00 40,400.00 Purchase price 354,816.00 354,816.00 26400 x 13.44 Total annual cost 306,540.96 395,216.00 88,675.04 (b) Should Pottery Ranch buy the finials? No, Pottery Ranch should not buy the finials as the total cost in that method is higher by 88,675.04 (c) No, income would decrease by $ 33,400.04 (88674.04 - 55275)
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