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 61% 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 33,300 curtain rods per year.

A supplier offers to make a pair of finials at a price of $12.90 per unit. If Pottery Ranch accepts the supplier’s offer, all variable manufacturing costs will be eliminated, but the $49,200 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.

Prepare an incremental analysis to decide if Pottery Ranch should buy the finials.

It should keep producing their own finials

Explanation:

As the variable cost to produce are lower than the supplier offer:

4 materials + 5 labor + 61% of labor = 12.05

The company do not save any dollar in taking the offer.

Also to that cost it will be added the fixed overhead which is being allocated to finials thus, increasing further the supplier proposal.

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