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 Net income Increase Make Buy Direct materials Direct labor Variable overhead cost Fixed manufacturinqc Purchase price Total annual costs (b) Should Pottery Ranch buy the finials? (c) Would your answer be different in (b) if the productive capacity rele ased by not makindq the finials could be used to produce income of $20,000 Net income Increase Make Buy Total annual cost Value Value Total cost