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.

(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).)

Make Buy Net Income
Increase (Decrease)
Direct materials $Pottery Ranch Inc. has been manufacturing its own $Pottery Ranch Inc. has been manufacturing its own $Pottery Ranch Inc. has been manufacturing its own
Direct labor Pottery Ranch Inc. has been manufacturing its own Pottery Ranch Inc. has been manufacturing its own Pottery Ranch Inc. has been manufacturing its own
Variable overhead costs Pottery Ranch Inc. has been manufacturing its own Pottery Ranch Inc. has been manufacturing its own Pottery Ranch Inc. has been manufacturing its own
Fixed manufacturing costs Pottery Ranch Inc. has been manufacturing its own Pottery Ranch Inc. has been manufacturing its own Pottery Ranch Inc. has been manufacturing its own
Purchase price Pottery Ranch Inc. has been manufacturing its own Pottery Ranch Inc. has been manufacturing its own Pottery Ranch Inc. has been manufacturing its own
Total annual cost $Pottery Ranch Inc. has been manufacturing its own $Pottery Ranch Inc. has been manufacturing its own $Pottery Ranch Inc. has been manufacturing its own

(b)

Should Pottery Ranch buy the finials?

Pottery Ranch Inc. has been manufacturing its own NoYes, Pottery Ranch should Pottery Ranch Inc. has been manufacturing its own not buybuy 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 $61,137?

Pottery Ranch Inc. has been manufacturing its own NoYes, income would Pottery Ranch Inc. has been manufacturing its own increasedecrease by $Pottery Ranch Inc. has been manufacturing its own