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 54% 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 26,000 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.30 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $46,700 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
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost

(b)

Should Pottery Ranch buy the finials?

select between Yes and No                                                          NoYes, Pottery Ranch should select an option                                                          not buybuy 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 $49,700?

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

Answer 1

Differential analysis
			Make	Buy	Effect on Income
Direct material		104000	0	104000
Direct labour		130000	0	130000
Variable overheads		70200	0	70200
Fixed overheads		46700	46700	0
Cost of purchase		0	345800	-345800
Total annual cost		350900	392500	-41600
No, Ranch shall not buy the component
Differential analysis
			Make	Buy	Effect on Income
Direct material		104000	0	104000
Direct labour		130000	0	130000
Variable overheads		70200	0	70200
Fixed overheads		46700	46700	0
Opportunity cost-New product	49700	0	49700
Cost of purchase		0	345800	-345800
Total annual cost		400600	392500	8100
Yes, now Ranch should buy the component