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 $4 and $5, respectively. Normal production is 32,100 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.35 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.

Answer 1

						Net Income
a)				Make	Buy	Inc (Decrease)
	Direct Materials			128400		128400
	Direct Labor			160500		160500
	Variable overhead costs			101115		101115
	Fixed manufacturing costs			49,400	49,400	0
	Purchase price				428535	-428535
	Total annual cost			439415	477935	-38520
b)	No,	Pottery Ranch Should		not buy	the finials
c)	Yes	income would		increase by	6920
	( for part c, from income given in question deduct the 38,520)
	( you will get the amount by which income will increase and
	replace it from my answer of 6920)