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29 June, 21:50

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 63% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.51 and $4.73, respectively. Normal production is 28,300 curtain rods per year.

A supplier offers to make a pair of finials at a price of $13.20 per unit. If Pottery Ranch accepts the supplier's offer, all variable manufacturing costs will be eliminated, but the $48,200 of fixed manufacturing overhead currently being charged to the finials will have to be absorbed by other products.

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  1. 30 June, 01:32
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    For now, it is better to keep producing in house. If demand increases, Pottery Ranch must outsource some of the production.

    Explanation:

    Giving the following information:

    The variable manufacturing overhead is charged to production at a rate of 63% of direct labor cost. The direct materials and direct labor cost per unit to make a pair of finials are $3.51 and $4.73, respectively. Normal production is 28,300 curtain rods per year.

    A supplier offers to make a pair of finials for $13.20 per unit.

    Fixed costs are a sunk cost, therefore it is not taken into account.

    Make in house:

    Unitary cost = 3.51 + 4.73 + (4.73*0.63) = $11,22

    Outsource:

    Unitary cost = 13.20

    For now, it is better to keep producing in house. If demand increases, Pottery Ranch must outsource some of the production.
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