Exercise 20-5 Pottery Ranch Inc. has been manufacturing its own finials for its
ID: 2569908 • 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 57% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.85 and $4.84, respectively. Normal production is 25,500 curtain rods per year A supplier offers to make a pair of finials at a price of $13.23 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $46,400 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.Explanation / Answer
a) Incremental Analysis:
$98175
(25500*$3.85)
123420
(25500*$4.84)
70349
(123420*57%)
337365
($13.23*25500)
Fixed manufacturing overhead will remain even if the goods are purchased or they are manufactured. Hence, they are irrelevant cost and not to be considered in incremental analysis.
Here the income decreases by $45421 if finials are purchased from outside supplier.
b) No, Pottery Ranch should not buy the finials.
As the cost of manufacturing the finials is less than buying them. Company should continue to manufacture the finials.
c) Yes the answer is different.
The income would increase by $6000.
If the productive capacity released by not making the finials would fetch income of $51421. Hence net income would increase by $6000.
Particulars Make Buy Net Income Increase(Decrease) Direct materials$98175
(25500*$3.85)
$ $98175 Direct labour123420
(25500*$4.84)
123420 Variable overheads cost70349
(123420*57%)
70349 fixed manufacturing costs 0 0 0 purchase price337365
($13.23*25500)
(337365) total annual cost $291944 $337365 ($45421)Related Questions
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