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 54% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.92 and $4.64, respectively. Normal production is 26,000 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.30 per unit. If Pottery Ranch accepts the supplierâs offer, all variable manufacturing costs will be eliminated, but the $46,700 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.

The Preparation an incremental analysis is below:-

No, Pottery ranch should not buy because incremental cost of $58,094

Explanation:

The Preparation an incremental analysis is below:-

                                    Make          Buy          Net income Income

                                                                                /Decrease

Direct material           $101,920                               $101,920

                              ($3.92 × 26,000)  

Direct Labor                $120,640                              $120,640

                             ($4.64 × 26,000)

Variable manufacturing  $65,146                              $65,146

                            ($120,640 × 0.54)

Fixed manufacturing $46,700         $46,700

Purchase price                                  $345,800       ($345,800)

                                                ($13.30 × 26,000)

Total cost               $334,406           $392,500       ($58,094)

No, Pottery ranch should not buy because incremental cost of $58,094

reducing the scale of the market for a new product.