Question

Pronghorn 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 61% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.73 and $4.69, respectively. Normal production is 33,300 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.90 per unit. If Pronghorn accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $49,200 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. (Round answers to 0 decimal places, e.g. 1250. If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Make		Buy		Net Income Increase (Decrease)
Direct materials		$		$		$
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost		$		$		$

Answer 1