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 63% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.51 and $4.73, respectively. Normal production is 28,300 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 $48,200 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.

Answer 1

Answer:

For now, it is better to keep producing in house. If demand increases, Pottery Ranch must outsource some of the production.

Explanation:

Giving the following information:

The variable manufacturing overhead is charged to production at a rate of 63% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.51 and $4.73, respectively. Normal production is 28,300 curtain rods per year.

A supplier offers to make a pair of finials for $13.20 per unit.

Fixed costs are a sunk cost, therefore it is not taken into account.

Make in house:

Unitary cost= 3.51 + 4.73 + (4.73*0.63)= $11,22

Outsource:

Unitary cost= 13.20

For now, it is better to keep producing in house. If demand increases, Pottery Ranch must outsource some of the production.