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 $46,700 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.
Prepare the incremental analysis for the decision to make or buy the finials. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
|Variable overhead costs|
|Fixed manufacturing costs|
|Total annual cost||$||$||$|
Should Splish Brothers buy the finials?
|YesNo, Splish Brothers should buynot buy the finials.|
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 $|
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