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.

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.