Reference no: EM131213340

Rowe Pottery designs and makes specialized gift quality pottery in Wisconsin. Rowe is considering manufacturing its own clay. Currently, the cost to buy clay is $2.55 per pound. If Rowe were to make the clay, three raw materials would have to be purchased. Mat 1 cost $.28/lb, Mat 2 cost $.44/lb and Mat 3 cost $.70/lb. A batch of clay would require 200 lbs of Mat 1 200 lbs of Mat 2 and 100 lbs of Mat 3. The clay would be mixed in a large vat for proper curing and consistency. Three employees ($15/hr labor and benefits) would be needed to monitor each batch of clay which takes 10 hours and yields 500 pounds of clay. Variable overhead would consist of additional maintenance on the required equipment and storage of the unfinished clay and would total $535 per batch of clay. The clay could be produced in the current facility but would result in approximately $90,000 of additional inventory on hand at any given time plus $45,000 up front cost for the new mixing vat (new assets). Currently, Rowe buys 250,000 pounds of clay each year. What is the return on assets if Rowe decides to make its own clay? Should they make the clay? Explain your conclusion.