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 63% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.59 and $4.97, respectively. Normal production is 32,100 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.37 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $49,400 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 Pottery Ranch should buy the finials. (Round answers to 0 decimal places, e.g. 1,225. 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		$		$		$
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost		$		$		$

(b)

Should Pottery Ranch buy the finials?

NoYes

, Pottery Ranch should

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 $60,293?

YesNo

, income would

increasedecrease

by $

Answer 1

						Net Income
a)				Make	Buy	Inc (Decrease)
	Direct Materials			115239		115239
	Direct Labor			159537		159537
	Variable overhead costs			100508		100508
	Fixed manufacturing costs			49,400	49,400	0
	Purchase price				429177	-429177
	Total annual cost			424684	478577	-53893
b)	No,	Pottery Ranch Should		not buy	the finials
c)	Yes	income would		increase by	6400