Question

Splish Brothers 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 57% 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 35,000 curtain rods per year.

A supplier offers to make a pair of finials at a price of $12.80 per unit. If Splish Brothers 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 Splish Brothers buy the finials?

                                                          YesNo, Splish Brothers should                                                           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 $39,850?

                                                          YesNo, income would                                                           increasedecrease by $

Answer 1