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 68% 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 25,300 curtain rods per year.

A supplier offers to make a pair of finials at a price of $12.95 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 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).)

		Make		Buy		Net Income Increase (Decrease)
Direct materials		$enter direct materials in dollars		$enter direct materials in dollars		$enter direct materials in dollars
Direct labor		enter direct labor in dollars		enter direct labor in dollars		enter direct labor in dollars
Variable overhead costs		enter variable overhead costs in dollars		enter variable overhead costs in dollars		enter variable overhead costs in dollars
Fixed manufacturing costs		enter fixed manufacturing costs in dollars		enter fixed manufacturing costs in dollars		enter fixed manufacturing costs in dollars
Purchase price		enter the purchase price in dollars		enter the purchase price in dollars		enter the purchase price in dollars
Total annual cost		$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                                                          NoYes, Pottery Ranch should select an option                                                          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 $18,415?

select between Yes and No                                                          YesNo, income would select between increase and decrease                                                          increasedecrease by $enter a dollar amount

Answer 1

a
	Make	Buy	Net income Increase (Decrease)
Direct materials	101200	0	101200
Direct labor	126500	0	126500
Variable overhead costs	86020	0	86020
Fixed manufacturing costs	46400	46400	0
Purchase price	0	327635	-327635
Total annual costs	360120	374035	-13915
b
No, Pottery Ranch should not buy the finials
c
Change in income = 18415-13915= $4500
Yes, income would increase by $4500
Workings:
Direct materials	101200	=25300*4
Direct labor	126500	=25300*5
Variable overhead costs	86020	=126500*68%
Purchase price	327635	=25300*12.95