Question

Marigold 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 62% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.98 and $4.78, respectively. Normal production is 30,400 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.16 per unit. If Marigold accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $43,100 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.
Prepare an incremental analysis to decide if Marigold should buy the finials. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

It will be advantageous to acceot the offer as it will save cost for the firm

`\left[\begin{array}{cccc}&produce&buy&Differential\\$Purchase&&-400064&400064\\$Manufacturing Cost&-356397.44&&-356397.44\\$Allocate Cost&-43100&-43100&0\\$Total Cost&-399497.44&-443164&43666.56\\\end{array}\right]`

Step-by-step explanation:

Materials 3.98

Labor 4.78

Variable Overhead: 2.9636

(62% of DL)

Total: 11.7236

proposed unit cost: 13.16

unavoidable fixed cost 43,100

manufacturing cost: 30,400 x 11.7236

purchase option; 30,400 x 13.16