Question

# Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is...

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).)

 Net Make Buy Income Increase (Decrease) \$ 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 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 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 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 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 \$ 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

 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

#### Earn Coins

Coins can be redeemed for fabulous gifts.