Pottery land 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 land 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. Make Buy Net IncomeIncrease (Decrease) Direct materials $ $ $ Direct labor Variable overhead costs Fixed manufacturing costs Purchase price Total annual cost $ $ $ (b)Should Pottery land buy the finials? (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 $20,000?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 3CMA: Aril Industries is a multiproduct company that currently manufactures 30,000 units of Part 730 each...

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Pottery land 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 land 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.

	Make	Buy	Net Income Increase (Decrease)
Direct materials	$	$	$
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost	$	$	$

(b)

Should Pottery land buy the finials?

(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 $20,000?

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