Exercise 7-5

Pottery Inc. has been manufacturing its own curtain rods. It is operating at 100% of capacity. Variable factory overhead is charged to production at the rate of 70% of direct labor cost.

To make a curtain rod, direct materials are $4 while direct labor is $5 per curtain rod. Normal production is 30,000 curtain rods per year. A supplier offers to make a curtain rod at a price of $12.95 per unit.

If Pottery Inc accepts the suppliers offer, all variable manufacturing costs will be eliminated, BUT $45,000 of fixed factory overhead will have to be absorbed by other products.

Instructions

(a) Prepare the incremental analysis for the decision to make or buy the curtain rods.

(b) Should Pottery Inc buy the rods? Why or why not?

a)	Make	Buy	Net Income Increase or (Decrease)
Direct Materials
Direct Labor
Variable Overhead
Fixed Overhead
Purchase Price
Total Annual Costs

b)