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?

Question

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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