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 $13.46 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $40,400 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).)

Answer 1

Answer:

It will increase cost by $72,594

It is not convinient to buy the finials

It will be better to keep the production

Explanation:

Direct Materials 3.73

Direct labor       4.69

Variable overhead

61% of labor cost

4.69 x 0.61 =     2.86

Total Variable Cost 11.28

Offered Price         13.46

-                               Make                 Buy              Difference

Unit Cost                               $11.28       $13.46      -$2.18

Total Variable Cost    $375,624.00  $448,218.00  -$72,594.00

Fixed Cost                      $40,400.00   $40,400.00  $-  

Total Cost                    $416,024.00   $488,618.00 -$72,594.00