Answered step by step
Verified Expert Solution
Question
1 Approved Answer
E12-5 Use incremental analysis for make-or-buy decision Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods. The company is currently operating
E12-5 Use incremental analysis for make-or-buy decision | |||||||||||||
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 is charged to production at the rate of 70% of direct labor cost. The direct materials and the 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 Ranch 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. | |||||||||||||
Instructions | |||||||||||||
(a) | Prepare the incremental analysis for the decision to make or buy the finials. | ||||||||||||
(b) | Should Pottery Ranch 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? | |||||||||||||
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" . | |||||||||||||
(a) | Prepare the incremental analysis for the decision to make or buy the finials. | ||||||||||||
Make | Buy | Net income Increase (Decrease) | |||||||||||
Direct materials | ? | Value | Value | ||||||||||
Direct labor | ? | Value | Value | ||||||||||
Variable overhead costs | ? | Value | Value | ||||||||||
Fixed manufacturing costs | Value | Value | Value | ||||||||||
Purchase price | ? | Value | Value | ||||||||||
Total annual costs | ? | ? | ? | ||||||||||
(b) | Should Pottery Ranch 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. | |||||||||||||
Make | Buy | Net income Increase (Decrease) | |||||||||||
Total annual cost (above) | Value | Value | Value | ||||||||||
Opportunity cost | Value | Value | |||||||||||
Total cost | ? | ? | ? |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started