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 61% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.73 and $4.69, respectively. Normal production is 33,300 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.90 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $49,200 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).)b. Should Pottery Ranch 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 $61,137?

Answer 1

It should not, because their cost will increase by 53,946

If buying realize productive capacity cappable of made 61,137 income

then the net would be 61,137 - 53,946 = 7,191

For this scenario it would be better to accept the offer and use the production capacity in the other project.

Step-by-step explanation:

Direct Materilas 3.73

Direct labours 4.69

MO 61% labor

4.69 x 0.61 = 2.86

Total variable 11.28

Offered price: 12.90

`\left[\begin{array}{cccc}&Make&Buy&Difference\\Unit \: Cost&11.28&12.9&-1.62\\Total \: Variable \: Cost&375,624&429,570&-53,946\\Fixed \: Cost&49,200&49,200&0\\Total \:Cost&424,824&478,770&-53,946\\\end{array}\right]`