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 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)
Direct materials		$enter direct materials in dollars		$enter direct materials in dollars		$enter direct materials in dollars
Direct labor		enter direct labor in dollars		enter direct labor in dollars		enter direct labor in dollars
Variable overhead costs		enter variable overhead costs in dollars		enter variable overhead costs in dollars		enter variable overhead costs in dollars
Fixed manufacturing costs		enter fixed manufacturing costs in dollars		enter fixed manufacturing costs in dollars		enter fixed manufacturing costs in dollars
Purchase price		enter the purchase price in dollars		enter the purchase price in dollars		enter the purchase price in dollars
Total annual cost		$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

Answer 1

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