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 $ 3.92 and $ 4.64, 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 an incremental analysis to decide if Pottery Ranch should buy the finials. (Round answers to 0 decimal places, e.g. 1250. 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 a dollar amount rounded to 0 decimal places		$ enter a dollar amount rounded to 0 decimal places		$ enter a dollar amount rounded to 0 decimal places
Direct labor		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
Variable overhead costs		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
Fixed manufacturing costs		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
Purchase price		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places		enter a dollar amount rounded to 0 decimal places
Total annual cost		$ enter a total amount for this column rounded to 0 decimal places		$ enter a total amount for this column rounded to 0 decimal places		$ enter a total amount for this column rounded to 0 decimal places

(b)

Should Pottery Ranch buy the finials?

select an optionselect an option  NoYes, Pottery Ranch should select an optionselect 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 $66,194?

select an optionselect an option  YesNo, income would select an optionselect an option  increasedecrease by $ enter a dollar amount

Answer 1

A
	Make	Buy	Net Income Increase (Decrease)
Direct materials	101920		101920
Direct labor	120640		120640
Variable overhead costs	65146		65146
Fixed manufacturing costs	46700	46700	0
Purchase price		345800	(345800)
Total annual cost	334406	392500	(58094)
b
No,Pottery Ranch should not buy the finials.
c
Change in income = 66194-58094= $8100
Yes, income would increase by $8100
Workings:
Variable overhead costs = 120640*54% = $65146