Answered Essay: Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating at 10

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 $3.61 and $4.85, respectively. Normal production is 25,100 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.43 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,300 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 $ $ $
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost $ $ $

(b)

Should Pottery Ranch buy the finials?

 YesNo

, Pottery Ranch 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 $67,010?

 YesNo

, income would decreaseincrease

by $

Expert Answer

 

a) Incremental analysis:
Make Buy Net Income
Increase (Decrease)
Direct materials (25100*$3.61) 90611
0
90611
Direct labor (25100*$4.85) 121735
0
121735
Variable overhead costs (25100*$4.85*54%) 65737
0
65737
Fixed manufacturing costs 45300
45300
0
Purchase price (25100*$13.43) 0
337093
-337093
Total annual cost 323383 382393 -59010
b) No, Pottery ranch should not buy the finials. If the finials are bought it would result in decrease of net income by $59,010
c) If the finials are not made and the productive capacity can be used to produce income of $67010, then the net income will increase by 67010-59010 = $8,000.
Yes, Income would increase by $8,000.
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