Question

# Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is...

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 50% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are \$4 and \$5, respectively. Normal production is 25,000 curtain rods per year.

A supplier offers to make a pair of finials at a price of \$12.75 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the \$40,000 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.

(a)

Prepare the incremental analysis for the decision to make or buy the finials. (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) \$enter direct materials in dollars \$enter direct materials in dollars \$enter direct materials in dollars enter direct labor in dollars enter direct labor in dollars enter direct labor in dollars enter variable overhead costs in dollars enter variable overhead costs in dollars enter variable overhead costs in dollars enter fixed manufacturing costs in dollars enter fixed manufacturing costs in dollars enter fixed manufacturing costs in dollars enter the purchase price in dollars enter the purchase price in dollars enter the purchase price in dollars \$enter total annual cost in dollars \$enter total annual cost in dollars \$enter total annual cost in dollars

(b)

Should Pottery Ranch buy the finials?

 select between Yes and No NoYes , Pottery Ranch should select an option buynot 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 \$35,750?

 select between Yes and No YesNo , income would select between increase and decrease increasedecrease by \$enter a dollar amount

 Req a. Differential analysis Make Buy Effect on Income Direct Material 100000 0 100000 Direct labour 125000 0 125000 variable Mgh oh 62500 0 62500 Fixed Mfg oh 40000 40000 0 Purchase price 0 318750 -318750 Total Annual cost 327500 358750 -31250 Req b. No, the company shall not Buy. Req c. Differential analysis Make Buy Effect on Income Direct Material 100000 0 100000 Direct labour 125000 0 125000 variable Mgh oh 62500 0 62500 Fixed Mfg oh 40000 40000 0 Opportunity cost-Income 35750 0 35750 Purchase price 0 318750 -318750 Total Annual cost 363250 358750 4500 Yes, the answer is different Income will INCREASE by \$ 4500