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 62% 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 30,400 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.15 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $43,100 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).)

		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                                                          NoYesselect an option                                                          buynot buy

(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 $38,620?

select between Yes and No                                                          NoYesselect between increase and decrease                                                          increasedecreaseenter a dollar amount

Answer 1

Solution a:

Differential Analysis- Pottery Ranch Inc. - Making finials (alt 1) or Buying finials (Alt2)
Particulars	Making finials (Alt 1)	Buying Finials (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Direct material	$121,600.00	$0.00	$121,600.00
Direct Labor	$152,000.00	$0.00	$152,000.00
Variable overhead Cost	$94,240.00	$0.00	$94,240.00
Fixed manufacturing costs	$43,100.00	$43,100.00	$0.00
Purchase Price (30400*$13.15)	$0.00	$399,760.00	-$399,760.00
Total Cost	$410,940.00	$442,860.00	-$31,920.00

Solution b:

As there is net financial disadvantage, therefore company should not buy the product.

Solution c:

Differential Analysis- Pottery Ranch Inc. - Making finials (alt 1) or Buying finials (Alt2)
Particulars	Making finials (Alt 1)	Buying Finials (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Costs:
Direct material	$121,600.00	$0.00	$121,600.00
Direct Labor	$152,000.00	$0.00	$152,000.00
Variable overhead Cost	$94,240.00	$0.00	$94,240.00
Fixed manufacturing costs	$43,100.00	$43,100.00	$0.00
Purchase Price (30400*$13.15)	$0.00	$399,760.00	-$399,760.00
Income from productive capacity released	$0.00	-$38,620.00	$38,620.00
Total Cost	$410,940.00	$404,240.00	$6,700.00

As there is net financial advantage, therefore company should buy the product.