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 70% 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 30,000 curtain rods per year. A supplier offers to make a pair of finials at a price of $12.95 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,000 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 Pottery Ranch should buy the finials.

Answer 1

Answer and Explanation:

The preparation of the incremental analysis is presented below

Particulars Make Buy net Income Increase or (decrease)

Direct material $120,000 - $120,000

[$4 × 30,000]

Direct labor $150,000 - $150,000

[$5 × 30,000]

variable manufacturing $105,000 - $105,0000

[$150,000 × 70% ]

Fixed manufacturing $45,000 $45,000 -

Purchase price - 373,560 -$373,560

[30,000 × $12.95 ]

Total annual cost $420,000 $433,500 -$13,500

There is a decrement of $13,500 so it should be make decision rather buying decision