Question

P 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. (a) Prepare an incremental analysis to decide if P Ranch should buy the finials

Make Buy Net Income Increase (Decrease)

Direct materials

Direct labor

Variable overhead costs

Fixed manufacturing costs

Purchase price

total anual cost

Answer 1

	Make	Buy	Net income Increase (Decrease)
Direct materials	98175		98175
Direct labor	123420		123420
Variable overhead costs	70349		70349
Fixed manufacturing costs	46400	46400	0
Purchase price	0	337365	-337365
Total annual costs	338344	383765	-45421
Pottery Ranch should not buy the finials
Formulas used:
	Make	Buy
Direct materials	=25500*3.85
Direct labor	=25500*4.84
Variable overhead costs	=123420*57%
Purchase price		=25500*13.23