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 69% 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 25,400 curtain rods per year. A supplier offers to make a pair of finials at a price of $13.20 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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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 69% 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 25,400 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.20 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.

(a)
Prepare the incremental analysis for the decision to make or buy the finials. (Enter negative amounts using either a negative sign
preceding the number eg. -45 or parentheses e.g. (45).)
Net Income
Make
Buy
Increase (Decrease)
Direct materials
$4
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost
2$
(b)
Should Pottery Ranch buy the finials?
v , Pottery Ranch should
v the finials.
%24
%24
%24
%24
%24
%24
Transcribed Image Text:(a) Prepare the incremental analysis for the decision to make or buy the finials. (Enter negative amounts using either a negative sign preceding the number eg. -45 or parentheses e.g. (45).) Net Income Make Buy Increase (Decrease) Direct materials $4 Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost 2$ (b) Should Pottery Ranch buy the finials? v , Pottery Ranch should v the finials. %24 %24 %24 %24 %24 %24
(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 $24,650?
v , income would
v by $
Transcribed Image Text:(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 $24,650? v , income would v by $
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